Commercial awareness and acquisitions

Answer

Introduction

There are a wide range of aspects to 'commercial awareness'. Some articles Michelmores has produced previously have focused on commercial awareness as it relates to law firms – for example, pricing legal work and the use of AI by lawyers. Other articles have focused on specific aspects of business. This article looks at commercial awareness from a more 'regulatory' perspective, with a specific focus on the regulations applicable to acquisitions.

While corporate lawyers are negotiating and encapsulating in detailed corporate documentation all the details of the commercial arrangements between parties:

• Who’s to own what shares and how many?
• What are those shares worth?
• Who’ll have control in what circumstances?
• What will happen to employees?

As well as other key commercial issues (which are the primary focus of business people), lawyers advising on regulatory aspects are focused on the very different and potentially very frustrating (for clients) question of whether the deal will be allowed to go ahead at all given wider public interest considerations. Not only is this aspect of providing legal services therefore incredibly important in ensuring the deal can proceed, but it’s also interesting for the lawyers involved as they’re required to develop a real commercial awareness of the key aspects of a client's business, including the products and services they’re researching, developing, producing and selling, and weighing these against the relevant public interest considerations.

There are a number of different regulatory mechanisms that might kick in to prevent transactions proceeding. These can very much depend on the specific industry sector (eg, there’s a significant amount of regulation applicable in financial services) but there are two that can apply across the board:

• the national security provisions of the National Security and Investment Act 2021; and
• the merger control provisions of the Enterprise Act 2002.

Both regimes have the potential to entirely scupper transactions where it’s considered that the wider public interest in either protecting national security or competition and market functioning outweighs the private rights of the parties involved in the proposed deal.  Therefore, while the questions being analysed are quite different, the practical implications of the two can be quite similar from a client perspective and the ways of approaching them similar from the lawyers' perspective.

Client awareness

Crucially, clients must be made aware that there may be potential regulatory mechanisms that might have an impact on the commercial aspects of their transaction. Even if there are no actual regulatory concerns, these mechanisms may impact on elements of the timing aspects of the transaction that’ll inevitably have commercial impacts of some sort. For example, where they cause delays, these can be seen as costing money.

Some clients may be very familiar with such mechanisms, based on previous experiences, but others may be entirely new to them and see them only as 'red tape' which needs to be navigated. These clients will need to have the process carefully explained to them so that they can make appropriate strategic decisions and properly consider any risks involved and consequently what actions to take in the mitigation of those risks.

Risk management – mandatory notifications

Under the National Security and Investment Act 2021, for example, certain transactions must be notified to the Cabinet Office for clearance before they’re completed. Failing to notify and wait for clearance is a criminal offence, can also lead to civil penalties being imposed and, moreover, the transaction is void.

The transactions to which this applies are those that involve certain levels of shareholding and control being acquired and which involve one of 17 industry sectors (that are defined in very detailed secondary legislation and in relation to which there’s also quite detailed government guidance). Some activities will squarely sit within one of the 17 sectors, however, for others it’ll be necessary to understand the sometimes quite technical aspects of a client's business. 

In some respects, the approach to acquisitions that require mandatory notification is less complex because the acquirer has no choice but to notify and no choice but to wait for clearance before proceeding. However, the acquirer still has to wait for the statutory time periods for review by the Cabinet Office to have run their course, and this can be frustrating for clients who want to get on with running their businesses.

Risk management – voluntary notifications

Where acquisitions fall outside the mandatory thresholds, clients are faced with the choice of whether to make a voluntary notification. This is a parallel with UK merger control rules, where there are no mandatory notification requirements (unlike many other jurisdictions). 

The considerations are broadly as follows:

• If no notification is made, there’s a risk that the authorities will investigate post transaction. At the very minimum, an investigation will disrupt the running of the business. At worst, it’ll also lead to the forced sale of the business that’s been acquired, often causing considerable commercial disruption and financial losses.
• If a notification is made that’ll involve up-front management time and costs being incurred in seeking to get clearance to proceed. Neither the acquirer or the vendor may want to spend time and money on this while they’re focused on the other transaction details. In addition, vendors may wish to put all the regulatory risk onto acquirers and so may demand a price premium for taking part in a transaction structure that involves an up-front regulatory notification as opposed to one which doesn’t.

These decisions can be very finely balanced, both in the context of the National Security and Investment Act 2021 and the context of UK merger control.

Drafting notifications

Drafting notifications involves working closely with clients to really understand the practical aspects of the products and services that they provide and, particularly when it comes to merger control, the markets that they operate in. This requires developing a real commercial awareness of a client's business. It includes understanding things like who are the client's competitors, suppliers and customers, and what is it about the client's business that makes it profitable.

Conclusion

While some might regard 'regulation' as antithetical to 'free commerce', a key legal role is to help steer clients through what can sometimes be very complicated regulatory scenarios that are designed to protect the wider public interest. Doing this successfully requires working with a client to really understand the relevant aspects of their business, and over time developing considerable commercial awareness of many different markets as well as the wider public interest considerations involved. While corporate lawyers may be working on the headline commercial points that are driving the transaction, lawyers working on ensuring that the deal doesn’t trip up on any regulatory hurdles are involved in considering the commercial effects of the transaction against the relevant wider public interest considerations that are protected by regulations.

Noel Beale is a partner in the commercial team at Michelmores LLP.