The Mergers & Acquisitions Review: United Kingdom
Overview of M&A activity
The UK M&A market, despite the uncertainty caused by Brexit and the covid-19 pandemic, remained active in 2020, with 1,425 deals in the United Kingdom and Ireland worth $276.1 billion in aggregate. This represents a 21 per cent jump in value, but a 16 per cent fall in volume, compared to 2019.2 By comparison, EMEA deal value as a whole fell – across the same period – by 1 per cent, while deal volume suffered a steeper decline of 15 per cent.3 In line with global trends, the UK M&A market was most active in the second half of 2020, largely thanks to vaccine approvals and stabilising stock markets.4
The rebound of M&A activity demonstrated in the second half of last year continued into 2021. The total number of completed monthly domestic and cross-border M&A transactions reached a peak of 246 in March 2021 (the highest number recorded since January 2019).5 This recovery in deal volume was complemented by a recovery in deal value, which increased by 77 per cent from £75.1 billion in the first half of 2020 to £132.9 billion in the first half of 2021.6
Both inward and outward M&A followed similar trends. The value of outward M&A in the second quarter of 2021 was £6 billion, a £4.3 billion increase on the previous quarter.7 Meanwhile, the value of inward M&A in the second quarter of 2021 was £27.7 billion, an increase of £19.4 billion on the value recorded in the previous quarter.8
In public M&A, 24 firm offers were announced in the first half of 2021 for Main Market or Alternative Investment Market (AIM) companies. In the same period of 2020, when the covid-19 pandemic catapulted many countries (including the United Kingdom) into national lockdowns, only 12 firm offers were announced.9 Seven of the firm offers announced in the first half of 2021 had a value of over £1 billion, indicating that deal volume and deal value in public M&A have enjoyed a parallel resurgence. Interestingly, approximately 67 per cent of the bids announced in the first half of 2021 were by private equity and other fund-backed bidders, with over half involving a US bidder. The involvement of such bidders in the recovery of UK public M&A activity is part of a broader trend, with recent examples including the £219 million takeover of AA and the £3.4 billion takeover of Signature Aviation.
At the time of writing, the outlook for the UK M&A market looks positive. The appetite from international bidders remains high, and private equity funds are in possession of record levels of cash (an estimated $1.6 trillion, globally).10 Nevertheless, the future remains uncertain – the potential for rising covid-19 infections may subdue, and prompt caution amongst dealmakers.
General introduction to the legal framework for M&A
The Companies Act 2006 provides the fundamental statutory framework, and with the law of contract forms the legal basis for the purchase and sale of corporate entities. In addition, the City Code on Takeovers and Mergers (Takeover Code) regulates takeovers and mergers of certain companies in the United Kingdom, the Isle of Man and the Channel Islands. The Takeover Code has statutory force and the Takeover Panel (Panel) has statutory powers in respect of transactions to which the Takeover Code applies. Breach of any of the Takeover Code rules that relate to the consideration offered for a target company could lead to the offending party being ordered to compensate any shareholders who have suffered loss as a consequence of a breach. In addition, breach of the content requirements of offer documents and response documents may constitute a criminal offence. The Panel also has the authority to issue rulings compelling parties who are in breach of the requirements of the Takeover Code to comply with its provisions, or to remedy the breach. These rulings are enforceable by the court under Section 955(1) of the Companies Act. The Takeover Code has a wider scope than the EU Takeovers Directive and applies if the offeree (or potential offeree) is a UK public company and, in some instances, if the company is private or dual-listed.
The Financial Services and Markets Act 2000 (FSMA 2000) regulates the financial services industry and makes provision for the official listing of securities, public offers of securities, and the communication of invitations or inducements to engage in securities transactions. Following substantial amendments to the FSMA 2000, brought about on 1 April 2013 when the Financial Services Act 2012 (FS Act) came into force, financial regulation is split between two bodies: the Financial Conduct Authority (FCA), which regulates conduct in the retail and wholesale markets, and the Prudential Regulation Authority, which is responsible for the prudential regulation of banks and other systemically important institutions. As a consequence of the FS Act, more than 1,000 institutions (including banks, building societies, credit unions and insurers) are now dual-regulated. The FCA Handbook (containing the Listing Rules), the Prospectus Regulation Rules sourcebook (containing the Prospectus Regulation Rules) and the Disclosure Guidance and Transparency Rules Sourcebook (containing the Disclosure Guidance and Transparency Rules), promulgated by the FCA (the competent authority for the purposes of Part VI of the FSMA 2000), include various obligations applicable to business combinations involving listed companies, and contains rules governing prospectuses needed for public offers by both listed and unlisted companies. The Listing Rules, in particular, set out minimum requirements for the admission of securities to listing, the content requirements of listing particulars and ongoing obligations of issuers after admission. The Criminal Justice Act 1993 contains the criminal offence of insider dealing and the UK Market Abuse Regulation (UK MAR) (the retained EU law version of the Market Abuse Regulation) (with the Listing Rules, the DTRs and the Takeover Code) regulates the civil regime for insider dealing.
Merger control rules are contained in the Enterprise Act 2002. In addition, specific statutory regimes apply to certain areas, including water supply, newspapers, broadcasting, financial stability, telecommunications and utilities, and these separate regimes may have practical implications in merger situations.
The post-Brexit UK corporate law landscape looks remarkably similar to that of a year ago. This is partly by virtue of the Companies Act 2006, which has operated as the nucleus of UK corporate law since its advent, and partly a result of the 'on-shoring' of EU law under the European Union (Withdrawal Agreement) Act 2020. The United Kingdom and European Union entered a transitional period from 31 January 2020 until 31 December 2020, during which the United Kingdom remained bound by EU law. On 1 January 2021, at the end of this period, most EU law to which the United Kingdom was subject, as an EU member state, was 'on-shored', resulting in an alignment between UK and EU law. However, it is anticipated that the respective legal positions will diverge over time.
Developments in corporate and takeover law and their impact
i Takeover Panel: changes to the Takeover Code and practice
As noted in previous editions of The Mergers & Acquisitions Review, there have been recent amendments to Rule 29 and the approval of provisional legislation that came into force following the United Kingdom's exit from the European Union on 31 December 2020. There have also been long-awaited changes to the Code relating to conditions to offers and the offer timetable.
In addition, while there have been no further legislative changes to the Code regarding the increased disclosure obligations, which, as outlined in previous editions, came into force on 1 January 2018, there has been a shift in practice in reaction to this legislation. It has been noticeable that the Panel does now expect parties to disclose substantially more information – about, for example, the future of their business – than they may previously have been accustomed to providing.
It is also worth considering how wider trends impact takeovers in practice. In particular, the increasing influence of the Pensions Regulator (which now has greater powers to intervene in transactions) and the global rise in protectionism are both likely to affect how takeovers are conducted. It is foreseeable that legislation will be updated in the future to reflect these trends, but in the meantime, practitioners should consider how such changes may impact the structure of their transactions.
On 17 October 2018, the Takeover Panel introduced a series of amendments to Rule 29 (on asset valuations). The amendments do not materially alter the current application of Rule 29; rather, the changes primarily codify existing practice and provide increased clarification. Subject to some remaining variations, the amendments broadly bring Rule 29 in line with Rule 28 (on profit forecasts). These variations include, for example, the requirement for parties to undertake asset valuations fully; unlike Rule 28, there is no cover for ordinary course profit forecasts, which enable parties to circumvent the reporting requirements under Rule 28.
Offer conditions and timetable
Changes to the Code relating to conditions to offers and the offer timetable were published at the end of March 2021 by the Code Committee of the Panel. These changes, which broadly apply in relation to firm offers announced on or after 5 July 2021, include a simplification to the timetable intended to accommodate the often-extended time frames required for obtaining official authorisations and regulatory clearances. Further, they remove the special treatment given to conditions and pre-conditions relating to the clearance of an offer by the Competition and Markets Authority (CMA) or European Commission, and they introduce an ability (for a bidder or the target company) to request that the Panel suspends the offer timetable if any conditions relating to an official authorisation or regulatory clearance have not been satisfied by the date, which is two days prior to Day 39.
Significantly, the changes also remove the distinction between the date by which the acceptance condition must be satisfied and the date by which other conditions must be satisfied (or waived), in favour of a single day, Day 60, by which all conditions to an offer must be satisfied.
We have seen an expansion of foreign direct investment (FDI) screening regimes across the globe, a trend that was growing pre-crisis but has been accelerated to deal with issues highlighted by the pandemic and growing concern about investment from potentially hostile states. In June 2020, the UK government expanded its powers under the Enterprise Act 2002 to enable it to intervene on public interest grounds in transactions that might affect the United Kingdom's pandemic response, which could extend beyond the immediate health response to businesses active in internet services and the food supply chain, for example. The UK government has also expanded its ability to intervene in transactions in certain parts of the technology sector. It has also reaffirmed its intention to implement a wider foreign investment regime in a new National Security and Investment Bill, initially published in July 2018 and set out in the Queen's Speech in December 2019. The National Security and Investment Act 2021 was introduced to Parliament in November 2020 and received Royal Assent on 29 April 2021. Under the Act, a new statutory regime for government scrutiny of, and intervention in, acquisitions and investments – to protect national security – will be established. Notably, the Act includes five-year retrospective call-in powers, allowing for post-completion review of transactions that have not been notified to the government.
This growing focus on investment controls in the United Kingdom and elsewhere is becoming an increasingly important part of deal planning, with implications for deal strategies and timetables, and one that looks likely to be here to stay; however, it may also create opportunities for competitive advantage for bidders that do not trigger reviews or present prima facie national security concerns.
Foreign involvement in M&A transactions
Inward M&A decreased notably in 2020: foreign acquisitions of UK companies were valued at a total of £16.3 billion, compared with £55.6 billion in 2019 – a substantial decrease of £39.3 billion.11 The value of outward M&A also fell, although not as dramatically, from £21.9 billion in 2019 to £15.2 billion in 2020.12 These falls took inward and outward M&A deals to their lowest values since 2014 and 2010, respectively.
In the second quarter of 2021, the total value of inward M&A was £27.7 billion, an increase of £19.4 billion from the first quarter of 2021.13 Outward M&A accounted for £6 billion in the second quarter of 2020, an increase of £4.3 billion on the first quarter of 2021.14 Two notable outward acquisitions that completed during the second quarter of 2020 were Sensata Technologies Holding Plc's acquisition of Xirgo Technologies Intermediate Holdings LLC (USA) and Coca-Cola Europacific Partners Plc's acquisition of Coca-Cola Amatil Ltd (Australia).
Significant transactions, key trends and hot industries
i Private equity and fund-backed bids
Continuing a trend in public M&A from the past few years, 16 of the 24 firm offers announced in the first half of 2021 for Main Market or AIM companies were backed by private equity, other funds or investment companies. Eight of these offers had a value of over £500 million, and five were over £1 billion.15 In particular, US private equity firms have been very active in the United Kingdom this year. Nine of the bids backed by private equity firms were announced by US private equity bidders, compared to bids by only seven US private equity bidders across the entirety of 2020.
A current trend, and a contributing factor to the success of private equity, has been the increase in consortium bids (where two or more firms join together to purchase a target). The resulting increase in purchasing power, and de-risking of offers, has been hugely advantageous for private equity bidders. The offer by Pollen Street Capital Limited and DBAY Advisors Limited for Proactis Holdings Plc is a recent example of a private equity backed consortium bid. Private equity activity in UK public M&A is anticipated to continue, and perhaps further increase, in the foreseeable future.
ii Warranty and indemnity insurance
The use of warranty and indemnity (W&I) insurance in private M&A transactions has taken on greater importance in recent years. The London W&I insurance market (which comprises over 25 insurers) now has an estimated combined capacity for a single risk in excess of £1 billion.16 Insurance broker Paragon estimates that 949 transactions used W&I insurance in 2019, compared with 870 in 2018 and 353 in 2014.17 While the transactional risk insurance market suffered a decline in the first half of 2020, largely as a result of the covid-19 pandemic, it rebounded sharply alongside the broader M&A market in the second half of 2020.18 The market has continued to go from strength to strength, with the first quarter of 2021 seeing a 21 per cent increase in transactions using M&A insurance.19
W&I insurance is increasingly being used to support 'the full spectrum of transactions' irrespective of size.20 A driver for the growth of W&I is that sellers seek a clean break to clear funds. With buyers demanding the comfort of warranties and indemnities that are as extensive and unqualified as possible, W&I insurance assists in unblocking 'stalemate' issues surrounding the allocation of risk, where previously the differences between parties' positions could easily have resulted in a deal not proceeding.
iii Shareholder activism
As noted in previous editions, the past few years have seen a considerable increase in shareholder activism. This often features shareholders seeking to secure higher offers for a target company prior to their backing of a bid. Throughout 2020 and in the early part of 2021, we saw further examples of shareholder activism in the context of public M&A.
In February 2020, Anglo American plc's offer for Sirius Minerals plc resulted in Odey Asset Management LLP, which had a 1.29 per cent interest in Sirius, publishing an email setting out its view that the offer of 5.5 pence per share did not represent fair value for Sirius shareholders.21 It was also highlighted by Odey that there was a low turnout at Sirius' AGMs, magnifying the power of Sirius shareholders who did vote.22 Despite Odey's attempts to drive the offer price up, the resolutions were passed by the requisite majorities in March 2020 and the deal went ahead.
Nava Resources BV's offer for KAZ Minerals PLC, which was announced in October 2020, was met by further resistance from shareholders in 2021. Nava Resources chose to switch the structure of its initial 640 pence per share bid (from a scheme to an offer) last year, following reports that numerous shareholders, not persuaded by the value of the offer, were threatening to vote against it. Nevertheless, earlier this year KAZ's fifth and seventh largest investors (RWC Partners and CFC Management, respectively) indicated that they would vote against the offer. This prompted the announcement of an increased recommended cash offer of 780 pence per share (in February 2021), which was then improved to an 850 pence per share cash offer (in March 2021), as well as a special dividend payable should the final offer become or be declared unconditional in all respects. The offer finally became unconditional as to acceptances on 9 April 2021, but shareholder activism notably led to a change in both offer structure and price.23
As markets stabilise, shareholder activism will continue to play an important participative role in M&A transactions. This is despite a slight decline in activity by activist shareholders during the covid-19 pandemic.24
iv Sector trends
After a significant decrease in deal volume in 2020, public M&A enjoyed a broad sectoral spread in the first half of 2021. The most active sectors were healthcare (18 per cent), financial services (14 per cent), investment (14 per cent) and real estate (14 per cent), and the largest transaction, the £3.5 billion consortium offer for Signature Aviation, was in the aerospace and defence sector.25
The aggregate deal value for the first half of 2021 in healthcare, the most active sector, was £2.5 billion. Two notable transactions were Ramsay Health Care's £1 billion offer for Spire, and Carlyle's £958 million offer for Vectura.26 In light of the covid-19 pandemic, the increased interest in healthcare companies is unsurprising.
Financing of M&A: main sources and developments
Fewer bids backed by debt financing were seen in 2020 when compared with 2019 (50 per cent of deals in 2020 as against 56 per cent of deals in 2019), with a notable increase in bids financed with equity in the second half of 2020. The first half of 2021 saw a slight increase in the volume of bids backed by debt financing, to 54 per cent, and activity is expected to remain buoyant as 2021 continues.
Short-term bridge or interim facilities remain the most commonly used debt finance structure, particularly for larger sponsor-backed transactions. Bridge and interim facilities offer the advantage of allowing a relatively quick negotiation for certain funds purposes, sometimes with the negotiation of commitment papers for the take-out financing taking place in parallel.
Bridge facilities are typically refinanced within a very short time frame (often before the acquisition closes) and may be offered on a 'covenant-lite' basis, adopting high-yield bond-style incurrence or very limited covenants, which may include key covenants such as the negative pledge, financial indebtedness, sanctions and significant change undertakings and a financial covenant (for example, a leverage ratio), together with acquisition-related covenants. Bridge facilities typically include margins that step-up over time to encourage early refinancing. The levels and frequency of these step-ups vary, depending on the transaction and refinancing timetable and planned take-out.
An increased incidence in the use of long-term loans was seen in 2020 (as opposed to bridge financing) for certain funds purposes, possibly as a result of the amount of liquidity in the loan market coupled with pent-up demand for investment opportunities. However, it may also be the result of bidders preferring the certainty of agreeing long-term funding upfront, over the pressure to refinance in the public markets, amid the continuing pandemic.
The covenant package applicable to longer-term debt tends to be based on the offeror's existing debt facilities and covenant package. Margins are variable, depending on factors such as the structure of the facilities, the rating of the offeror and complexity and size of the transaction.
Direct lending remains an important source of M&A bid finance, particularly in the mid-market where there was a decrease in bank-led financing structures during the pandemic. Many credit funds have significant amounts of capital to deploy, giving more scope for these funds to compete directly with banks. Unitranche facilities, in particular, are increasingly being used outside the sponsor-led market. Unitranche debt (term loans that are split 'behind the scenes' between senior and junior lenders, avoiding the need for senior and junior debt instruments and intercreditor arrangements) may carry the additional advantage of 'covenant-lite' terms, similar to the institutional Term Loan B market.
i Covid-19: employment implications for M&A
The covid-19 pandemic has forced many businesses to make significant changes to their employment arrangements, whether by furloughing employees, freezing or cutting pay, bonuses and other benefits, or changing working patterns. There has also been the challenge of making workplaces covid-secure and negotiating when and how employees return to the workplace. Some businesses have already had to make redundancies, and many others are facing that prospect in the coming months.
From an M&A perspective, the pandemic has led to many purchasers seeking specific warranties about what measures the seller has taken in relation to its staff to manage the impact of the pandemic. These measures may have the potential to create significant financial and reputational damage for the target company and the purchaser if not handled appropriately, and in some cases may require specific indemnity protection. All this has meant that employment issues are taking on greater significance in an M&A context than they may have done before the pandemic.
ii TUPE: split employment?
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply to certain asset transfers and service provision changes, and form one of the key considerations from an employment perspective on an M&A transaction. On a TUPE transfer, the contracts of employment of in-scope employees will be automatically transferred to the purchaser. Where there is a transfer of part of an undertaking, and employees work partly in the transferring business and partly in the retained business (or partly in another part of the business that is transferring to a different purchaser), there needs to be an analysis of what happens to those employees. This analysis is often quite nuanced, with the role and responsibilities of the employees being relevant, as well as the proportion of their hours spent working for each side of the business. However, the traditional analysis is that the whole employment contract of each employee must either transfer to the purchaser (or one of them) or remain with the retained business. A decision of the Court of Justice of the European Union (CJEU) last year (ISS Facility Services NV v. Govaerts  EUECJ C-344/18) cast some doubt on that analysis and envisaged the possibility of a transferring employee having their employment contract split between multiple transferee employers following a TUPE transfer, in proportion to the tasks performed by the employee.
The Govaerts decision has since been applied by the UK Employment Appeal Tribunal (EAT) in McTear Contracts Limited v. Bennett UKEATS/0030/19 (25 February 2021). In McTear, the EAT confirmed that the Govaerts principle of splitting employment contracts between multiple transferees applies to service provision changes as well as asset transfers. The outcomes in Govaerts and McTear have been viewed as somewhat controversial in the United Kingdom, where the courts have in the past rejected the possibility of employment contracts being split on the transfer of part of the business. However, it now seems that employees with split roles could claim that both transferees (or the transferor, or both) would be their employer, and therefore liable for a portion of their subsequent salary or dismissal costs. Businesses should be aware of the potential for this kind of argument (and liability) arising, and carefully analyse the nature of the work that employees do for each part of the business, to assess the likely exposure.
iii Brexit: employment implications for M&A
Since the United Kingdom left the European Union, the most immediate impact from an employment law perspective has been on European Works Councils (EWCs). Because the United Kingdom is now a third country, UK employees are unable to ask their employer to set up an EWC, and there are differences in the rules governing existing EWCs. Businesses with EWCs will need to bear this in mind, particularly when undertaking M&A activity that falls within the scope of EWC consultation.
There has also been the end of free movement and the introduction of a new points-based immigration system on 1 January 2021 for EU and non-EU workers coming to the United Kingdom. The impact of these changes is harder to judge in the light of the covid-19 pandemic but is likely to become clearer as time goes on. As international travel gradually recommences, businesses need to get to grips with new rules on business travel between the United Kingdom and the European Union, which may impact M&A activity.
In the longer-term, much uncertainty remains about what impact Brexit will have on UK employment law. A significant proportion of UK employment law is derived from (and was guaranteed by) European law, and now ceases to be so guaranteed. However, the scope for changes to UK employment law is restricted by the terms of the UK–EU free trade agreement, which restricts both sides from weakening or reducing their labour protections in a manner affecting trade between them. At the time of writing, we have no indication of whether the UK government is intending to make changes to certain aspects of employment law that have been mooted in a post-Brexit context, and that may impact on M&A transactions. These include most notably TUPE, with likely candidates being a loosening of the restrictions on changing terms and conditions, and (potentially) on pre-transfer redundancies. Another potential candidate for change could be the rules on informing and consulting employees on collective redundancies, which can cause particular difficulties in insolvency transactions. Businesses will need to keep a watching brief on these issues.
iv New pensions legislation to increase scrutiny of the pensions impacts of corporate activity
With effect from 1 October 2021, the Pensions Regulator's powers to scrutinise corporate activity are increased and new financial penalties and criminal offences are introduced.27
There are new civil penalties of up to £1 million, and new criminal penalties of up to seven years' imprisonment. The new criminal offences are particularly broad: a person (regardless of their relation to the pension scheme in question) who 'without reasonable excuse' intentionally acts to prevent the recovery of the whole or any part of a statutory Section 75 debt (a debt that becomes due under Section 75 of the Pensions Act 1995 from a sponsoring employer to a pension scheme in certain circumstances, including the insolvency of the employer), including, for example, by preventing the debt from becoming due or compromising the debt, will potentially have committed a criminal offence. Furthermore, a person will potentially have committed a criminal offence where he or she engages in a course of conduct that detrimentally and materially affects the likelihood of accrued pension benefits being received, if he or she knew or ought to have known about that consequence and did not have a reasonable excuse for his or her conduct. These offences could capture a wide range of corporate actions taken in relation to a company's defined benefit pension liabilities. The Pensions Regulator is expected shortly to publish guidance setting out its approach to prosecution under these new offences.
The Pensions Regulator has the power to require an employer (or a connected or associated person) to contribute a specified amount to a pension scheme, where (in summary) that employer or person is party to an act (or failure to act) whose main purpose was to avoid or reduce a Section 75 debt, or otherwise has a materially detrimental effect on the likelihood of accrued pension benefits being received. From 1 October 2021, this power is extended to situations where an act (or failure to act) would have reduced a pension scheme's recovery if a Section 75 debt becomes due, or where the act (or failure to act) would have reduced the value of the employer's resources, if the reduction is material relative to the amount of the estimated Section 75 debt. These changes are intended to protect pension schemes from a deterioration in the financial position of their sponsoring employers. However, they may have wide-ranging consequences where a corporate transaction reduces the assets available to an employer. As with the new criminal offences outlined above, guidance from the Pensions Regulator will be crucial in determining the potential exposure of employers (and their connected and associated persons) to regulatory intervention.
Other changes, expected to take effect in April 2022, will increase the scope of the current notifiable events regime by adding to the number of events that have to be notified to the Pensions Regulator, requiring notification at an earlier stage, and, in relation to some notifiable events, requiring employers to provide an additional statement to the Pensions Regulator, copied to the pension scheme trustees, later in the transaction, describing the adverse effects that the transaction might have on the pension scheme or the employer, and stating how the employer proposes to mitigate any such impact on the pension scheme. Notification will be required at an earlier stage in the transaction process than under the current regime (which requires a notification as soon as reasonably practicable after the relevant decision is made).
v New funding code for UK pensions schemes
The Pensions Regulator is expected to publish a new funding code that will focus on the long-term funding objective of pension schemes. Parties to commercial transactions involving defined benefit pension schemes will need to bear in mind that pension trustees will be focused on being able to reach their long-term funding target (i.e., a buy-out of benefits with a third-party insurer, or funding self-sufficiency). The new code is unlikely to be in place before late 2022 or early 2023.
Following the departure from the European Union and the end of the transition period at the end of 2020, the year 2021 may have looked like an opportune time to improve the competitiveness of the United Kingdom's tax system. While there has been some movement in this direction, the covid-19 pandemic has fundamentally moved the goal posts. Since the start of 2021, the UK government has announced tax rises which 'if delivered will raise the tax burden in the United Kingdom to the highest-ever sustained level'.28
i Fiscal events and tax rises
In November 2016, then UK Chancellor Philip Hammond announced that the United Kingdom would move to a single major fiscal event each year, the annual autumn Budget starting in autumn 2017. This new fiscal timeline was soon derailed by the general election in December 2019 and the covid-19 pandemic. There were no autumn Budgets in 2019 or 2020. Instead, in 2020, there was a March Budget, a Summer Statement and an Autumn Statement. In 2021, there was again a March Budget and what might come to be called the 'September Announcement' of further tax rises. UK Chancellor Rishi Sunak has, however, announced an Autumn Budget for 27 October 2021, giving tax practitioners some hope that we might return to the 'normal' fiscal timeline and a more moderate pace of change.
After it was announced as part of the March 2020 Budget that the UK corporation tax rate would remain at 19 per cent for the next two financial years (rather than decreasing to 17 per cent as had been planned), the March 2021 Budget included the announcement that the United Kingdom's corporation tax rate will be going up from 19 per cent to 25 per cent from April 2023. At the same time, the diverted profits tax rate will be increased from 25 per cent to 31 per cent to maintain the same rate differential of 6 percentage points with corporation tax and a small profits rate, set at the current corporation tax rate of 19 per cent, be reintroduced (a previous, arguably more generous, small profits rate had been abolished in 2015). These rate increases and introduction of the small profits rate have already been enacted as part of the Finance Act 2021 that received Royal Assent on 10 June 2021. It is, however, expected that the autumn Budget will clarify how the new corporation tax rates will apply to banks, given that, as per the announcement made as part of the March 2021 Budget, the government intends to maintain the taxation of banks (which, because of the bank corporation tax surcharge, is higher than in respect of other corporates) at the current level. The increase in corporation tax rates is expected to translate to an increase – in real terms – in the level of taxation and the government's tax take. This contrasts with previous decreases in the headline corporation tax rate, which tended to be accompanied by measures to broaden the tax base and, therefore, did not actually result in a commensurate decrease (in real terms) in the tax burden and tax take.
As part of the March 2021 Budget, it was also announced that the annual exempt amount for capital gains tax (CGT) would be frozen at £12,300 per annum until April 2026. The income tax personal allowance and higher rate threshold would be similarly frozen, but only after a final increase to, respectively, £12,570 per annum and £50,270 from April 2021. Over the coming years, the effect of inflation is likely to erode the value of the CGT annual exempt amount and bring more taxpayers into the higher (40 per cent) and additional (45 per cent) income tax bands.
On 7 September 2021, the UK government announced plans to introduce a new Health and Social Care Levy in two stages.29 From April 2022, primary Class 1 national insurance contributions (NICs) paid by employees, secondary Class 1 NICs paid by employers and Class 4 NICs by the self-employed will be increased by 1.25 percentage points. This increase will be reversed from April 2023 when the new levy will be introduced, which will be calculated and charged on the same basis. Given that the levy or temporary increase in NICs will apply in respect of both types of Class 1 contributions, it will hit employment income twice (with income from self-employment being hit only once). The tax burden on employment income will therefore increase by 2.5 percentage points, half being charged to employees and half to employers. Following the approval of the new levy, including the temporary increase in NICs, by the House of Commons on 8 September 2021, the measure is expected to 'be legislated for shortly' in accordance with the government's plan. As part of the same package, it was also announced that the rate of income tax on dividends would be increased by 1.25 percentage points from April 2022. It is expected that this increase will be legislated for in the next Finance Act.
Amongst these eye-watering tax rises, one might, however, identify one positive implication. The possibility of an alignment of CGT with income tax rates, which would have had a significant impact in particular on entrepreneurs and private equity, seems to have passed, at least for now.
ii Improving the competitiveness of the UK tax system
A number of measures to enhance the attractiveness of the UK tax system were announced as part of the March 2020 Budget. One has already been legislated for, another is expected to be included in the next Finance Act and others are still under review or the subject of consultation.
The Finance Act 2021 established the legislative underpinning for the creation of freeport tax sites across Great Britain where businesses benefit from certain enhanced allowances and relief in respect of NICs. In respect of freeports in England, relief from stamp duty land tax and business rates will also be available.
On 20 July 2021, draft legislation for a new regime for the taxation of qualifying asset holding companies (QAHCs) was published for inclusion in the next Finance Bill.30 The introduction of this new regime forms part of the broader review of the United Kingdom's funds regime (see next paragraph). It is intended to make the United Kingdom more attractive as a jurisdiction to establish asset-holding companies by ensuring that investors are taxed broadly in the same manner as if they had directly invested in the assets. UK-resident non-listed companies (other than UK real estate investment trusts) can elect into the QAHCs regime if they meet certain criteria in respect of their ownership and activities. Tax benefits available under the regime include an exemption from withholding tax, an exemption from tax in respect of certain overseas income and gains, and that certain payments are treated as interest rather than distributions.
A policy paper, entitled 'A new chapter for financial services', published on 1 July 2021, states that the UK government 'will maintain and build on the UK's attractive and internationally respected ecosystem for financial services across both regulation and tax'.31 The ongoing review of the UK funds regime that was announced at the March 2020 Budget forms part of this. Further details on the scope of the review were set out in a call for input published in January 2021.32 It seeks views on the effectiveness of previous reforms in achieving tax neutrality between investing directly and through a fund, and on potential additional future reforms. Separately, the UK government is reviewing the value added tax (VAT) treatment of fund management and, as announced in the March 2020 Budget, a working group has been formed to examine the VAT treatment of financial services.
iii Stamp duty
Anyone who has been involved in private M&A transactions with a UK target or looked at restructuring a UK group will have come across (and may well have been puzzled by) the UK's system for paying, or requesting relief from, stamp duty, a tax charged in respect of instruments transferring share ownership.
The normal process involved sending original hardcopy transfer instruments to the Stamp Office in Birmingham by post. The instrument would then be stamped, using a special stamping machine, to either denote that the relevant duty had been paid or that a relief applied. It would then be sent back, again by post. The process has been criticised as archaic and lengthy – the latter being particularly problematic, given that the purchaser cannot be recorded as the legal owner of the transferred shares until the stamped instrument has been returned.
In response to the covid-19 pandemic, the stamping process was modified as follows. Instead of sending original instruments by post, copies were to be submitted by email. HMRC would then confirm by return email that the relevant duty had been paid or a relief applied and the target's register of members could be updated on the basis of this email confirmation.
On 18 June 2021, it was announced that the changes introduced in response to the covid-19 pandemic would be made permanent.33 From 19 July 2021, the physical stamping of instruments of transfer has been officially discontinued and the stamping machines have been decommissioned. While this is a welcome development, it has not yet spelled the end to our stamp duty woes. At the time of writing, there are long waiting times for confirmation emails from HMRC that duty has been paid, or relief is available, in respect of routine transactions. It can only be hoped that, in the not-too-distant future, stamp duty will finally be reformed to become a self-assessed tax such that changes in share ownership can be recorded immediately following submission of a stamp duty return on the basis of an automatically generated confirmation number.
Unfortunately, no further immediate changes are currently anticipated. On 20 July 2021, the UK government announced that a Working Group will be formed to explore options for further modernisation. It is likely that changes will be made only after further rounds of public consultation.
i The UK merger regime
Mergers qualify for review under the UK rules if they meet a test relating to the turnover of the target or, alternatively, a 'share of supply' test. Where the UK turnover of the target exceeds £70 million, the turnover test will be satisfied. The share of supply test will be satisfied where the merger creates an enlarged business supplying 25 per cent or more of goods or services of any reasonable description or enhances a pre-existing share of supply of 25 per cent or more. In 2018, new jurisdiction thresholds were introduced in respect of certain defined sectors involving the development of military and dual-use equipment and systems, as well as parts of the advanced technology sector. However, the National Security and Investment Act 2021 removes these special thresholds and introduces a formal notification process for mergers involving sensitive sectors.
The CMA has the power to carry out an initial Phase I review, and has a duty to refer any qualifying transaction for a detailed Phase II investigation if it believes that the merger will or may give rise to a substantial lessening of competition. Phase I decision-making is undertaken by the senior director of mergers (or another senior CMA official). Phase II decision-making is undertaken by an independent panel of experts drawn from a pool of senior experts in a variety of fields.
Notification is voluntary in the sense that there is no obligation to apply for CMA clearance before completing a transaction. The CMA may, however, become aware of a transaction through its market intelligence functions (including through the receipt of complaints) and impose interim orders preventing integration of two enterprises pending its review. There is a risk that it may then refer the transaction for a Phase II investigation, which could result in an order for divestment.
The CMA strongly encourages parties to enter into discussions in advance of formal notifications to seek advice on their submission to ensure that a notification is complete and to lessen the risk of burdensome information requests post-notification. The CMA aims to start the statutory clock within 20 working days (on average across all cases) of submission of a substantially complete draft merger notice. Some cases, however, require much longer pre-notification periods. The average length of the total pre-notification period was 55 working days in the 2020 to 2021 financial year, which was in part a result of the impact of the pandemic on the CMA's ability to deal with its caseload.34
Once a transaction is formally notified, Phase I begins, and the CMA has a statutory time limit of 40 working days to reach a decision. The average length of Phase I was 35 working days during the 2020 to 2021 financial year.35 The CMA may extend the 40-working-day period in certain exceptional circumstances, such as if it is waiting for information from the merging parties.
If the CMA's duty to refer a transaction to a Phase II investigation is engaged, the parties have five working days from the substantial lessening of a competition decision (SLC decision) to offer undertakings in lieu of a reference to the CMA (although they may offer them in advance should they wish to do so). If the parties offer undertakings, the CMA has until the 10th working day after the parties receive the SLC decision to decide whether the offer might be acceptable, in principle, as a suitable remedy to the substantial lessening of competition. If the CMA decides the offer might be acceptable in principle, a period of negotiation and third-party consultation follows. The CMA is required to decide formally whether to accept the offered undertakings, or a modified form of them, within 50 working days of providing the parties with the SLC decision, subject to an extension of up to 40 working days if there are special reasons for doing so.
At Phase II, the CMA must issue its decision within a statutory maximum of 24 weeks; this period is extendable, in special cases, by up to eight weeks. If remedies are required, the CMA has a statutory period of 12 weeks (which may be extended by up to six weeks) following the Phase II review within which to make a decision on any remedies offered by the parties.
The CMA has significant powers to impose interim measures to suspend or reverse all integration steps and prevent pre-emptive action in relation to both completed and anticipated mergers. This ensures that, although notification is voluntary in the United Kingdom, the CMA is able to prevent action being taken that would result in irreversible damage to competition. Severe financial penalties may be imposed for breaches of any interim orders or undertakings (capped at 5 per cent of the aggregate group worldwide turnover).
The CMA levies substantial filing fees in respect of the mergers it reviews (between £40,000 and £160,000), depending on the turnover of the target business.
ii Treatment of mergers by the CMA
The CMA issued 38 Phase I merger decisions in the 2020 to 2021 financial year, 18 of which were unconditional clearances. Nine cases were referred for a Phase II review and undertakings in lieu of a reference were accepted in six cases.
The CMA issued seven Phase II decisions during the same period. One was an unconditional clearance and two were cleared subject to divestiture remedies. The CMA prohibited four mergers, and five cases were cancelled or abandoned at Phase II.
Overall, the CMA intervened (i.e., prohibited or accepted remedies) in just under a quarter of cases in the 2020 to 2021 financial year, which is around five times the rate of intervention from the European Commission over a similar period. The higher intervention rate can be explained by the voluntary nature of the UK merger control regime, which means that parties may elect not to notify transactions that do not give rise to significant competition issues.
iii Recently published statements and consultations relevant to mergers
The CMA has conducted a thorough review of its guidance over the last year, including issuing new versions of its merger assessment guidelines and its guidance on jurisdiction and procedure. These changes in part reflect the CMA's response to the United Kingdom's departure from the European one-stop-shop and its push to take its post-Brexit place alongside other global competition authorities. The new guidance also reflects changes to the CMA's practice that have occurred in recent years, particularly in relation to an expanded approach to jurisdiction, usage of dynamic theories of competition and a greater focus on mergers in innovative sectors. The CMA has also consulted on a range of other guidance documents, including its merger intelligence guidance and its interim measures guidance, and it expects to consult on its de minimis guidance later in 2021.
Together, these changes display the CMA's intention to act as an interventionist competition authority. This position was further reinforced through the issuance of a joint statement with the German and Australian competition authorities in April 2021 calling for more rigorous merger control.36
iv Brexit and merger control
The United Kingdom left the European Union on 31 January 2020 following the result of the 2016 referendum. Pursuant to the UK–EU Withdrawal Agreement, the United Kingdom was treated for most purposes as if it were still an EU Member State until 31 December 2020. Since that date, the one-stop-shop principle no longer applies with respect to the United Kingdom, meaning that businesses may need to submit parallel notifications in the United Kingdom and the European Union to obtain clearance for a deal. The CMA stated in its Annual Plan 2020–21 that it expected a 50 per cent increase in the number of merger cases and UK elements of international competition enforcement cases because of acquiring jurisdiction over cases previously reserved to the European Commission.37 The CMA has increased its workforce to address the increased case load.
Despite Brexit and the covid-19 pandemic, the UK M&A market demonstrated considerable resilience in 2020. Confidence in the market has also increased in 2021, with high levels of deal activity in the first half of the year. The healthcare sector, likely in response to the pandemic, has been particularly active, while technology and energy remain huge growth industries. With the United Kingdom out of national lockdown, and the vaccine injecting investor confidence into the M&A market and broader economy, the outlook for the remainder of 2021 looks promising. These positive signs, however, remain susceptible to a resurgence in covid-19 case numbers and the possibility of future national lockdowns.
1 Mark Zerdin is a partner at Slaughter and May.
2 Mergermarket, 'Deal Drivers: EMEA FY 2020'.
5 ONS – Office for National Statistics, 'Mergers and acquisitions involving UK companies: April to June 2021'.
6 Mergermarket, 'UK Trend Report H1 2021'.
7 ONS – Office for National Statistics, 'Mergers and acquisitions involving UK companies: April to June 2021'.
9 Practical Law, 'Public M&A Trends and Highlights from first half of 2021'.
10 Mergermarket, 'UK Trend Report H1 2021'.
11 ONS – Office for National Statistics, 'Mergers and acquisitions involving UK companies, annual overview: 2020'.
13 ONS – Office for National Statistics, 'Mergers and acquisitions involving UK companies: April to June 2021'.
15 Practical Law, 'Public M&A Trends and Highlights from first half of 2021'.
16 Practical Law, 'Private M&A trends: report on warranty and indemnity insurance'.
18 Marsh JLT Specialty, 'Transactional Risk Insurance 2020: Year in Review'.
19 BMS, 'BMS Private Equity, M&A and Tax 2021 Report'.
20 Marsh JLT Specialty, 'Transactional Risk Insurance 2019: Year in Review'.
21 Practical Law, 'Public M&A Trends and Highlights from first half of 2020'.
22 Reuters, 'Hedge fund Odey to vote against Anglo's 'unfair' 405 million stg Sirius bid'.
23 Practical Law, 'Public M&A Trends and Highlights from first half of 2021'.
24 Practical Law, 'Public M&A Trends and Highlights from first half of 2020'.
25 LexisNexis, 'Market Tracker Trend Report: Trends in UK Public M&A deals in H1 2021'.
27 Under the Pension Schemes Act 2021 and regulations thereunder.
28 Institute of Fiscal Studies, 'An initial response to the Prime Minister's announcement on health, social care and National Insurance', published on 7 September 2021. Available at https://ifs.org.uk/publications/15597.
34 Mergers updates, Law Society Competition Section seminar, 2 March 2021. FY 2020–2021 figures taken from this seminar do not include data for March 2021.
36 Joint statement by the Competition and Markets Authority, Bundeskartellamt, and Australian Competition and Consumer Commission on merger control, April 2021.
37 CMA Annual Plan 2020–2021 (March 2020).