1. Introduction

Recent years have tested the resilience of the UK mergers and acquisitions (M&A) market in ways few could have anticipated and UK dealmakers, operating from an open, internationally active economy with close trading relationships across both the Atlantic and Europe, have had to adapt deal terms and processes.

2. An uncertain market

Brexit, when it came, produced contradictory impulses: the fall in the value of sterling made UK assets look attractive to overseas buyers, driving a surge in inbound investment, while others adopted a cautious wait-and-see approach, reluctant to commit capital until the shape of the UK’s future trading relationships became clear.

The pandemic suppressed deal activity for a short time but was followed by an M&A boom, fuelled by pent-up demand, record levels of private equity dry powder, the growth of the technology sector, and then low interest rates.

Geopolitical conflict resulted in further supply-chain disruption. The return of investment controls and trade barriers as instruments of policy introduced a new and unpredictable layer of risk. Inflationary pressures prompted central banks to raise interest rates, making credit more expensive and some deal economics harder to justify.

Taken individually, each of these events might have been treated as a temporary disruption. Taken together, they represent something more fundamental: a structural shift in the environment in which M&A transactions are negotiated, documented, and closed. The result is a market in which target valuations are volatile and deal-execution risk has increased.

3. National security controls

The most structurally significant recent legal development for UK M&A practitioners has been the introduction of the National Security and Investment Act 2021 in response to rising geopolitical risk. The legislation came into force in January 2022, creating a standalone investment-screening regime.

Mandatory advance clearance is required for transactions in 17 broadly drawn sensitive sectors ranging from defence and artificial intelligence to advanced materials and synthetic biology. Completion without clearance renders the transaction void. Voluntary notifications are also made where parties identify a risk that the government could use its broader call-in powers, which it retains for up to five years post-closing in respect of transactions that fell outside the mandatory notification regime.

The regime is agnostic as to an acquirer’s origin: UK acquirers are subject to the same notification requirements as overseas investors. That said, certain investor origins attract disproportionate scrutiny. Early-stage reforms are already under way: the UK government is consulting on the creation of standalone sectors for critical minerals, semiconductors, and water, while tightening other sector definitions, signalling that the regime is here to stay.

For cross-border deals, the position is further complicated by the European Union’s own investment-screening regulations and the introduction of different regimes at national levels. These impose their own notification and review obligations. UK dealmakers now routinely face a multi-jurisdictional matrix of regulatory consents.

The UK process is relatively smooth and clearance is usually given within 30 working days; however the need for advance consent has meant that conditional deals have become prevalent in the UK M&A landscape.

4. Conditional deals and execution risk

Historically, UK market practice has favoured simultaneous signing and completion. That preference for deal certainty has not disappeared, but the consequence of more conditional deals is that more deals are exposed to the risks of the period between signing and completion.

This matters because it exposes both parties to market movements, changes in the target’s business, and the possibility that the commercial rationale for the deal has shifted before the ownership changes hands.

5. Interim protections

This increased execution risk has driven a renewed focus on the contractual protections that govern the period between signing and closing. Three mechanisms are particularly important.

First, both sellers and buyers need to pay close attention to interim conduct-of-business covenants. These require the target business to be operated on a normal and consistent basis between exchange and completion. In a volatile trading environment, buyers need comfort that the business they are acquiring has not been materially changed or allowed to deteriorate between exchange and completion, and sellers need certainty about what decisions they can and cannot take without buyer consent.

Second, buyers will usually seek warranty repetition, requiring the seller to confirm that its warranties remain true and accurate at completion as well as at exchange; if so, sellers may negotiate a mechanism for a second disclosure letter at completion. This allows sellers to update their disclosures in light of events occurring between signing and closing, protecting them from warranty claims in respect of matters arising in the interim period, while giving buyers the option (in some structures) to walk away if the updated disclosures reveal a material deterioration.

Third, material adverse change (MAC) clauses, historically rarely invoked in UK-governed transactions and regarded as predominantly a US market convention, have come under the spotlight. Under English law, MAC clauses must be construed in accordance with ordinary principles of contractual interpretation and the trigger event assessed at the point the MAC clause was invoked. “Material” requires something significant or substantial impacting the company’s earning power over years rather than months. However, even with a tightly drafted clause, buyers are likely to find it challenging to invoke a MAC, and they take considerable risk if they do, as an incorrectly invoked MAC can expose the buyer to a claim of repudiatory breach of contract. Nevertheless, MAC clauses can provide buyers with leverage to reopen discussions on price, or to obtain concessions on other deal terms.

6. Locked box versus completion accounts

Price-adjustment mechanics have always been a significant area of negotiation, but market turbulence has sharpened the debate between the two dominant approaches.

The locked-box mechanism fixes the price by reference to actual financials as at a date prior to exchange, eliminating post-closing price-adjustment risk and providing both parties with price certainty from the moment of signing. Locked-box mechanisms are typically used in a seller’s market where the buyer takes on more of the economic risk or in private equity-backed deals where both seller and buyer wish to remove the risk of a post-closing financial dispute and where funds typically prefer to draw down once on completion and not make further calls to satisfy a pricing adjustment.

However, locked boxes come with challenges where the market is volatile and where there is likely to be a long gap between exchange and completion, both features of the market in recent times. In these conditions, the more likely it is that the price will not reflect the true value of the business at completion, and the harder it will be to set the so-called “profit ticker” that compensates the seller from the point of the locked-box date to the point of completion at an agreeable rate.

The completion accounts alternative retains flexibility where the target’s trading position is genuinely uncertain, allowing the purchase price to be adjusted by reference to the actual financial position of the business at closing. However, it introduces post-closing dispute risk and requires more sophisticated controls.

In recent years, the locked-box mechanism has retained its dominance in private equity-backed UK transactions, whilst completion accounts remain more prevalent in trade deals. Historically US acquirers were less inclined to use locked-box mechanisms when acquiring UK assets in an M&A transaction, but that distinction is less often observed: US investors in UK assets will, for the right deals, be willing to use the simpler locked-box mechanism for determining completion value.

7. Earn-outs: bridging the valuation gap

Valuation disagreements between buyers and sellers have become more acute where short-term financial performance has been distorted by pandemic-era earnings, supply-chain cost spikes or post-Brexit regulatory change and deals are being priced on forecast figures. In such cases, earn-outs have become an increasingly important bridging mechanism.

Drafting earn-out provisions requires care. Parties must agree on the appropriate performance metric, as well as the period over which performance will be measured, how they will determine the amount of each earn-out payment, post-closing obligations on how the buyer conducts the target business and a robust mechanism for dispute resolution.

While increasingly prevalent in private equity-backed transactions (despite investors usually preferring price certainty), the interaction between earn-out provisions and management warranties, seller non-competes, and “good leaver, bad leaver” mechanics adds further complexity for deals involving management sellers.

For trade buyers, earn-outs can be unattractive as they can limit the ability of the buyer to integrate the target into the buyer’s group during the earn-out period.

8. W&I insurance: managing recourse risk

As the risk profile of M&A has changed, transactional risk solutions have gained in popularity. The most common of these is warranty and indemnity (W&I) insurance which has, over the course of the last decade, moved from a niche transactional tool to a mainstream feature of UK M&A.

The product serves a dual function: it lowers the risk profile of a transaction for both sides, enabling sellers to achieve a clean exit without retaining significant residual liability, and allows buyers in competitive auction processes to present a more attractive bid by reducing their reliance on seller recourse.

W&I insurance is increasingly common in both UK and US transactions, and it is advisable to consider whether it is appropriate early in the transaction process. Insurer competition in the UK market has been intense, driving improvements in policy terms and the speed of the underwriting process.

The limits of W&I must, however, be understood clearly. Standard policies exclude known risks, meaning that matters identified in due diligence or disclosed against warranties will not be covered. Crucially, macro risks of the type that have dominated the deal environment in recent years generally sit outside the scope of cover. These risks can include geopolitical events, tariff changes, sanctions exposure and supply-chain disruption. W&I insurance is a recourse management tool, not a substitute for rigorous due diligence or other risk allocation mechanisms.

9. The new normal

The cumulative effect of Brexit, the pandemic, geopolitical conflict, and supply-chain disruption has crystallised the need to agree deal terms that appropriately allocate risk across the parties.

UK dealmakers no longer treat mechanisms in isolation: interim conduct of business covenants and MAC clauses manage the risks of a sign-to-close period; national security clearance is a deal-critical workstream from day one; price-adjustment mechanisms appropriate to the deal and earn-outs resolve pricing uncertainty that volatile markets inevitably create; and W&I insurance reduces residual recourse exposure for both sides.

English law, the UK’s mature transactional infrastructure and a sophisticated M&A market remain genuine competitive advantages. With uncertainty showing no sign of abating, dealmakers who master the full toolkit will be best placed to get transactions done.