In light of the recent UK government approval being granted for the purchase of Royal Mail’s parent company, International Distribution Services, by Czech billionaire Daniel Křetínský’s EP Group, Beyond Corporate’s Jack Kimberley highlights some of the key transactional considerations for a shareholder looking to sell their business to an overseas buyer.
The £5.3bn takeover will see the state-owned company pass into foreign ownership, with the UK Government retaining a ‘Golden Share’ entitling it to special governance rights. These will include ensuring that Royal Mail does not move its headquarters overseas and is restricted in its ability to pay taxes elsewhere without the approval of the UK Government.
Royal Mail has struggled in recent months with difficulties adapting to the surge in online shopping and strained relations with its postal workers. On top of this, Ofcom fined the postal service £10.5mn in early December of this year due to its failures in delivering letters on time. This is the second fine in two years for Royal Mail, who received a £5.6mn penalty from the watchdog in late 2023.
EP Group has pledged that it will modernise the postal service, which business ministers hope will be a step towards a financially stable Royal Mail.
Selling to an overseas entity
Whether you are a postal giant like Royal Mail or a small owner-managed business, should you be considering a sale to an overseas company there are a number of key areas to be considered, a few of which being the following:
- Regulatory framework – a seller will need to ensure that an overseas buyer is aware of UK regulatory considerations which may apply depending on the nature of the deal and business carried on by the target:
- Where an overseas buyer is to become the owner (or tenant under certain leases) of land or property in the UK, they must (with certain exemptions) register as an overseas entity on the Register of Overseas Entities through Companies House and set out their beneficial owners / shareholder structure or managing officers. This can take a few weeks, so it is sensible to identify whether this is necessary at the start of the transaction.
- Should the target operate in or undertake work concerning a sensitive economic sector (e.g. defence or communications), the National Security and Investment Act 2021 may require a buyer to make a mandatory notification for clearance to the Cabinet Office or the transaction may be caught under the voluntary notification regime. The buyer will need to prepare a questionnaire for the seller which will form the basis of their application. Once accepted by the Cabinet Office for review, getting a determination on the application will typically take 30 working days.
- Structure – both parties will need to ensure that the way the deal is structured, particularly around pricing, is agreed early on (likely within the heads of terms) to ensure clarity for both sides as the deal progresses:
- Certain price determination mechanisms may be favoured in an overseas buyer’s market. Typically, the European markets favour a locked box mechanism (locking a price in pre-completion with certain provisions for leakage) whereas the US tend to opt for completion accounts (agreeing a pre-completion target and preparing accounts post-completion, adjusting the price up or down in relation to that target).
- The tax position in the UK is likely to shape the consideration structure of any deal, which should be conveyed to an overseas buyer in order to ensure both parties are on the same page and understand the reasoning for such structure, which is likely to take into account tax reliefs and allowances in relation to any tax liabilities incurred (such as capital gains) on disposal.
- Transaction terms & jurisdiction – the form of transaction documents will vary between jurisdictions, despite largely covering the same core underlying elements. Where the overseas entity has greater bargaining power, you may have to concede to their form of documents:
- Contractual protections are likely to operate differently between jurisdictions. In England and Wales claiming for breach of warranty (a statement of fact which turns out to be false) may be onerous and costly, whereas jurisdictions such as the UK tend to favour warranties on an indemnity basis, making recovery of losses far easier for a buyer but more burdensome on the seller and subjecting them to greater risk exposure.
- Insurance for warranties and indemnities may be commonplace in most jurisdictions, but the extent of the coverage, conditions and costs attached may vary. The US has very comprehensive W&I policies and a competitive insurance market (which equally keeps policy price competitive), with the UK and Europe following suit. Conversely, and despite the building appetite for transactions in Africa, W&I coverage here remains expensive due to perceived risks and a less competitive the insurance market, meaning coverage is less likely to be sought and therefore a greater emphasis needs to be place on the disclosure process.
- The jurisdiction governing the transaction will be agreed in the heads of terms and set out within the transaction documents (most notably the purchase contract). It is likely preferable to have these governed by your native legal system, however this may not always be an option and you might need to concede to the contract being governed in accordance with a foreign legal regime.
Selling your business to an overseas entity can be a great way of realising the hard work and investment you have put into your company, however it requires careful consideration and planning to ensure that you can reach a mutually agreeable position with the buyer which bridges a potential gap between market norms in different jurisdictions whilst ensuring you control your risk exposure.
We strongly recommend that you seek legal guidance from the commencement of any transaction, which may also include local counsel in a foreign jurisdiction.
If you require any advice on selling your business to an overseas entity, please contact our corporate team at [email protected].
