Conditions precedent to completion: share purchase agreement | Practical Law

Conditions precedent to completion: share purchase agreement | Practical Law

A selection of possible conditions precedent to completion for use in a share purchase agreement (SPA).

Conditions precedent to completion: share purchase agreement

Practical Law UK Standard Clause w-017-3390 (Approx. 40 pages)

Conditions precedent to completion: share purchase agreement

by Practical Law Corporate
Maintained • , England, Wales
A selection of possible conditions precedent to completion for use in a share purchase agreement (SPA).
Note: About this document
Close Drafting Note

About this document

The clauses in this document are for use in a share purchase agreement (SPA) where completion of the transaction is conditional on the satisfaction of one or more conditions precedent following exchange of the SPA. For example, a conditional SPA may be necessary where a corporate buyer or seller requires shareholder approval before proceeding to completion, or the transaction must be cleared by a relevant merger control authority.
For general information on conditions precedent to completion of a share acquisition, see Practice notes:
For a checklist of additional matters for the buyer's solicitors to consider when drafting an SPA for a transaction involving a split exchange and completion, see Checklist, Drafting a share purchase agreement: split exchange and completion.

Drafting assumptions

This document is intended for use in conjunction with the following standard form SPAs:
The drafting assumes that:
  • The transaction involves the acquisition of the entire issued share capital of a target company with at least one subsidiary (together the target group). Each member of the target group is a private company limited by shares, incorporated in England and Wales. Unless the context requires otherwise, references to the target in the drafting notes to this document should be construed as a reference to the target and each of its subsidiaries.
  • Completion of the transaction is conditional on the satisfaction of at least one condition precedent, and it is necessary (whether for legal or commercial reasons) for there to be an interval between exchange of the SPA and completion of the transaction to allow satisfaction of the condition(s).
  • Each applicable condition precedent will be set out in a schedule to the SPA.
  • The laws of England and Wales govern the SPA.
  • Except where expressly defined in this document, the SPA already includes an appropriate definition for all capitalised terms that are used in the conditions precedent (including the terms, Buyer, CMA, Company, Completion, Subsidiary, Transaction and Warranties). Those definitions are not repeated in this document accordingly. For the relevant definitions, see Standard document, Share purchase agreement: single corporate seller: non-simultaneous exchange and completion: clause 1.1. Always check the SPA carefully to ensure it includes an appropriate definition for all capitalised terms.

Scope of conditions precedent

While this document includes some of the more commonly occurring conditions precedent, the selection is by no means exhaustive, nor will all the conditions be relevant to every transaction. It is therefore important to ensure that the conditions schedule to the SPA is properly tailored to reflect the legal and commercial circumstances of the deal. For example, other conditions that may be relevant to some transactions include:
  • Regulator's consent. If the target is operating in a highly regulated industry (such as the banking or insurance sectors), the relevant industry regulator's consent to the transaction may be required. For example, if the target company is a UK authorised person within the meaning of section 191G(1) of the Financial Services and Market Act 2000 (FSMA), the transaction may need to be notified to the UK's Financial Conduct Authority (FCA) for approval prior to completion under the change of control regime set out in Part 12 of FSMA. For a condition precedent addressing this scenario, see Standard clause, Condition precedent to completion: FSMA change of control consent.
  • No material adverse change (MAC clause). A condition of this type seeks to allow the buyer to withdraw from the transaction if there is a material adverse change in the business, assets or profits of the target group between exchange of the SPA and completion. For general guidance on MAC clauses, see Practice note, Material adverse change (MAC) clauses: acquisitions. For a form of MAC clause, see Standard clause, Material adverse change clause: share purchase agreement.
  • No termination of a key contract. The buyer may want to include a condition that none of the target group's key contracts is terminated, nor their terms materially altered, prior to completion. This issue could also be addressed to some extent through warranty protection, provided that the warranties are repeated between exchange and completion and the buyer has a right to terminate the SPA prior to completion for breach of warranty.
  • Tax clearances. If the seller requires tax clearance for the transaction which cannot be obtained before the SPA is exchanged, it may be appropriate to include receipt of the relevant clearance as a condition to completion (see, for example, Standard clause, Loan notes as consideration: share purchase agreement: Schedule: paragraph 1 (Tax clearance)). For general information on tax clearances, see Practice note, Tax clearances: general.
  • New contracts for key employees. The buyer may impose a condition that certain key employees enter into new service contracts on or before completion.
  • Third party consent. It is possible, particularly where there is a change of control provision in certain of the target group's key contractual arrangements, that the consent of a major customer or supplier will be required before the transaction can be completed.
  • No insolvency. It may appropriate to address what should happen if the target company or the seller were to enter into formal insolvency proceedings in the gap between exchange and completion. If the buyer requires protection against this eventuality, one way it could be conferred is by making the continued solvency of the target company (and, if appropriate, the seller) a completion condition. Similarly, if the seller is concerned about the buyer's continued solvency, it could consider seeking a right to terminate the SPA if the buyer enters an insolvency procedure between exchange and completion. Securing such a right may be particularly important where the transaction involves a substantial element of vendor finance (such as an allotment of shares in the buyer or loan notes) or deferred consideration. Note that, in relation to a contract for the supply of goods and services, section 233B of the Insolvency Act 1986 (as inserted by the Corporate Insolvency and Governance Act 2020), may impair a seller’s ability to rely on termination rights that would otherwise be available to it if the buyer becomes subject to a “relevant insolvency procedure” (as defined in section 233B(2) of the Insolvency Act 1986). For more information on section 233B, see Practice note, Restrictions on terminating supply contracts in insolvency proceedings: Section 233B: no termination of supplies of goods and services generally. There is no statutory definition of a contract for the "supply of goods and services" for the purposes of section 233B, and so we understand that the expression should be taken to have its usual, or ordinary, meaning (for further information, see Practice note, Restrictions on terminating supply contracts in insolvency proceedings: What is a contract for the supply of goods and services?). However, it Practical Law's understanding, having raised the matter with them, that the Insolvency Service does not consider a contract for the sale of shares to be a contract for the supply of goods and services within the meaning of the section 233B.

Negotiating and drafting issues

  • Take care when drafting the conditions precedent to avoid circularity. There might be a risk of this occurring where, for example, completion of the SPA is inter-conditional with another document, such as a loan facility agreement under which the funding for the transaction will be advanced.
  • The scope of each condition precedent must be clear and precise, so that both parties have the same understanding of what is required for the condition to be satisfied.
  • Wherever possible, the conditions should be structured so that its satisfaction can be measured objectively. The seller should be reluctant to accept conditions that allow the buyer to exercise subjective judgement in determining whether the condition is satisfied, thereby providing an opportunity for the buyer to withdraw from the transaction capriciously.
  • If an element of subjectivity cannot be avoided (for example, where a regulatory consent may be issued subject to certain caveats or conditions, and the buyer will need to be satisfied with the terms of those conditions or caveats), ensure that the relevant party is required to act reasonably in exercising their judgement.
  • Avoid including conditions that are not strictly necessary and which, if not satisfied, could obstruct completion of the transaction. Ensure that any requirements that are capable of being satisfied before exchange are dealt with during the pre-contract period. For example, the buyer should insist that the seller obtains all requisite tax clearances before exchange, or assume the risk of proceeding without those clearances.
AGREED TERMS
1.[Conditions to completion
[
[Add the following sub-clauses to the conditions clause in the SPA. Update the clause cross-references in this provision to reflect the final numbering of the conditions clause and Schedule in the SPA.]
Note: Conditions to completion (optional clause)
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Conditions to completion (optional clause)

In the case of a conditional SPA, the agreement should make express provision for the parties' respective responsibilities in ensuring (so far as possible) that each applicable condition is fulfilled. The Practical Law standard form conditional SPAs contain general provisions requiring each party to:
However, as there is a degree of uncertainty as to what steps a general endeavours and co-operation clause actually requires in any given case, it is also common for SPAs to expressly set out, in varying degrees of detail, specific actions that each party is (or is not) obliged to take with the objective of satisfying a particular completion condition.

National security condition

If the transaction is conditional on clearance being received under the National Security and Investment Act 2021 (NSI Act), this optional drafting could be included to particularise the steps that must be taken to ensure the condition is satisfied by the agreed longstop date.
For further information on the NSI Act and when a share purchase transaction may require clearance under it, see:

Which party is responsible for the NSI condition?

If the transaction is within the scope of the mandatory notification regime under the NSI Act (see Drafting note, When does the mandatory notification regime apply?), the notification must be made by the person gaining control of, or acquiring an interest in, the relevant qualifying entity pursuant to the notifiable acquisition (section 14(1), NSI Act). In the context of most share purchase transactions, this will typically be the buyer.
A notification under the voluntary regime may be given by either an acquirer, seller or any qualifying entity concerned (section 18(2), NSI Act). However, the drafting in these clauses assumes that the buyer will wish to be responsible for and control the notification process, even where the voluntary regime applies.
A notification can be submitted on behalf of the notifying party by an authorised representative, such as their solicitor.
1.1Without prejudice to the generality of clause[s] [ADD NUMBER[S] OF GENERAL ENDEAVOURS AND CO-OPERATION PROVISIONS IN CONDITIONS CLAUSE IN SPA], the Buyer shall use [reasonable OR best] endeavours at its own cost to procure that the condition in Paragraph 2 of Schedule 1 (NSI Condition) is satisfied as soon as possible following the date of this agreement and, in any event, by the Longstop Date. In particular, the Buyer shall:
(a)as soon as reasonably practicable following the date of this agreement[ and, in any event (but subject always to the Seller complying with its obligations in Clause 1.2), no later than [DATE]], prepare and submit to the Investment Security Unit (ISU) a [mandatory OR voluntary] notice relating to the Transaction (NSI Notice) in accordance with the requirements of section [14 OR 18] of the National Security and Investment Act 2021 (NSI Act);
Note: Preparation and submission of NSI Notice
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Preparation and submission of NSI Notice

Assuming the buyer is responsible for obtaining the requisite clearance under the NSI Act (see further, Drafting note, Which party is responsible for the NSI condition?), the seller will typically expect the SPA to include an express obligation on the buyer to prepare and submit the requisite transaction notification promptly (or within a specified timeframe after the SPA is exchanged), as this will help to:
  • Ensure the clock starts running as soon as possible on the statutory period for assessing the notification. Where a transaction is proactively notified either under the mandatory or voluntary notification regime, the Secretary of State must decide within 30 working days whether to clear or call in the transaction for a detailed national security assessment. The timetable for the initial review does not start to run until the Investment Security Unit (ISU) confirms that the notification has been accepted. A notification can be rejected for a number of reasons, including where insufficient information has been provided. Rejections also commonly occur because the wrong form has been used. For further information, see Practice note, National Security and Investment Act 2021: overview: Initial screening of notifications.
  • Avoid the risk that the NSI Condition is not satisfied before the Longstop Date simply because the buyer has failed to notify in a timely manner.

Notification process under NSI Act

A transaction notification (whether mandatory or voluntary) under the NSI Act must:
For further information on submitting a notification under the NSI Act, see:
For links to the relevant notification forms, see:
The buyer may want to consider seeking pre-notification guidance from the ISU on completing the notification. This approach may help to maximise the likelihood of the notification being accepted as complete on first submission, thus ensuring that the clock begins to run on the initial 30 working-day assessment period at the earliest opportunity.

Negotiating and drafting issues

  • Include the reference to section 14 of the NSI Act if the notification is made under the mandatory notification regime or, if the voluntary regime is being used, refer to section 18.
  • This clause includes optional drafting to specify a backstop date by which the NSI Notice must be submitted. While buyers are likely to be reluctant to include this optional language in the first draft (due to uncertainty as to how much time it will require to complete the notification and assemble all the necessary supporting documents), the seller may want to add this subsequently to ensure timely submission.
  • If the buyer is prepared in principle to accept that submission of the NSI Notice must take place by a specified date, it should include the bracketed proviso to ensure this obligation is subject to the seller having supplied any information that the buyer requires to complete the notification.
  • The Secretary State has the power to call-in an inflight transaction for a national security review of its own volition, without a notification having been made by any of the parties (section 1(1)(b), NSI Act). The buyer may therefore want to add a proviso that the obligation to submit a notification falls away if the Secretary of State acts before notification to call in the transaction.
  • If the seller is in a particularly strong negotiating position, it may also seek to negotiate the right to review and comment on the NSI Notice before it is submitted. For example:
(b) give the Seller prior notice of the NSI Notice and other any substantive document, communication, notification or filing that the Buyer proposes to submit to the ISU or the Secretary of State in connection with the Transaction, and: (i) provide the Seller with copies of such documents, communications, notifications or filings in draft form, including any supporting documentation or information reasonably requested by the Seller; (ii) give the Seller reasonable opportunity to provide comments on such drafts prior to their submission and (acting reasonably) take account of those comments in good faith; and (iii) promptly provide the Seller with the final copies of any such documents, communications, notifications and filings in the form submitted to the ISU or the Secretary of State;
However, as an NSI Notice could include commercially sensitive material as well as potentially personally sensitive information concerning the buyer's shareholders and directors, buyers may be unwilling to permit the seller this degree of involvement in the notification process. If the buyer cannot avoid accepting wider seller-participation rights, it should insist on a caveat that it is not obliged to share any information of a confidential or commercially sensitive nature, or which it is precluded from disclosing by an applicable legal or regulatory requirement, and that such information can be redacted from the relevant documents before being provided to the seller.
(b)promptly deal with any requests and enquiries from the ISU or Secretary of State in connection with the Transaction, and promptly supply any additional information, documents or explanations that the ISU or Secretary of State may require to complete their assessment of the NSI Notice;
(c)keep the Seller [promptly and ]regularly informed of progress towards satisfying the NSI Condition[ including (without prejudice to the generality of the foregoing) notifying the Seller in writing of:
Note: Obligation to keep seller informed
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Obligation to keep seller informed

Although the buyer is responsible for submitting the NSI Notice and will therefore lead on the notification process, sellers will often expect to receive progress updates to enable it monitor that the notification process is being handled effectively and expeditiously, and keep a track of when the condition is likely to be satisfied. The first part of this Clause 1.1(c) (before the square brackets) therefore includes a general obligation on the buyer to that effect.

Negotiating and drafting issues

If the seller is in a strong negotiating position, it may also seek to negotiate wider contractual rights enabling it to monitor and participate in the notification process, such as the right to participate in any meetings with the ISU or Secretary of State in connection with the NSI Notice. For example:
(d) in relation to any meetings with the ISU or the Secretary of State in connection with the NSI Condition (including, for the avoidance of doubt, any meetings held by conference call or other virtual means): (i) to the extent permitted by the ISU or Secretary of State, allowing any persons nominated by the Seller to attend such meetings and, where appropriate, to make oral submissions at such meetings; or (ii) where Seller representation at such meetings is not permitted or possible (and to the extent permitted by law), providing the Seller with a summary of the relevant meeting as soon as reasonably practicable thereafter.]
(i)
the progress of the NSI Notice and any other substantive communications, notifications or filings submitted to the ISU in relation to the Transaction;
(ii)
any substantive communications (whether written or oral) with, or requests for information or attendance received from, the ISU or the Secretary of State in relation to the Transaction; and
(iii)
any matter or circumstance that is reasonably likely to prevent the NSI Condition from being satisfied on or prior to the Longstop Date, as soon as reasonably practicable following such matter or circumstance coming to its attention].
1.2The Seller shall provide the Buyer with such information and assistance as the Buyer may [reasonably] require to comply with its obligations in relation to the NSI Condition, including promptly providing any information relating to the Company, the Seller or any other member of the Seller's Group that the Buyer reasonably requires for the purpose of preparing the NSI Notice or any other filings, submissions or notifications (including for the purposes of responding to requests for further information) in connection with the NSI Condition.
Note: Seller's obligation to provide information and assistance
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Seller's obligation to provide information and assistance

Although the buyer is responsible for preparing and submitting the NSI Notice (see further, Drafting note, Which party is responsible for the NSI condition?), it may require some input or assistance from the seller to complete its submission. For example, the NSI Notice requires a large amount of information relating to the company that is the subject of the notification (including (among other things) its contact details and company information, details of its activities, licences, whether it is cleared to receive or store classified information, whether it holds any dual-use items and a structure chart showing its current ownership), and in most cases the buyer will be relying on the seller to provide this information.
]
The SCHEDULE
Completion conditions
Note: Completion conditions
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Completion conditions

Insert these provisions as a new schedule (or part of a schedule) to the SPA and re-number any subsequent schedules accordingly.
For general information on conditions precedent to completion of a share acquisition, see Practice notes:
1.Shareholder resolution[s]
Note: Shareholder resolutions
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Shareholder resolutions

For further information on when a shareholder resolution may be required in connection with a share purchase transaction, see Practice note, Share purchases: overview: Shareholder approval.
For a more detailed shareholder consent condition for use where either party is a premium listed commercial company and completion of the transaction is conditional on obtaining shareholder approval for the acquisition or disposal as a class 1 transaction, see Standard clause, Condition precedent to completion: class 1 transaction: share purchase agreement (premium listed company).
1.1The passing, at a duly convened general meeting of the [Buyer OR Seller], of the resolution[s] in the agreed form [approving the Transaction].
2.National security review
Note: National security review
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National security review

The condition in this paragraph deals with the possibility of the transaction being subject to a notification requirement under the NSI Act.
With effect from 4 January 2022, the NSI Act overhauled the review of UK corporate transactions on national security grounds, by replacing the public interest merger regime contained in the Enterprise Act insofar as national security interests are concerned with standalone powers enabling broader government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security in the UK (NSI Regime).
For general information on the NSI Act, see Practice note, National Security and Investment Act 2021: overview.
For guidance on the main practical implications of the NSI Act) for share purchase transactions, see Checklist, National Security and Investment Act 2021: practical considerations for share purchases.

Scope of the NSI Regime

The NSI Regime applies to transactions and investments involving the acquisition of a right or interest that confers control over certain qualifying entities or qualifying assets. A qualifying entity includes (among others) a company incorporated in the UK. The in-scope transactions (referred to in the NSI Act as "trigger events") include:
  • The acquisition of votes or shares in a qualifying entity exceeding a threshold of 25% or 50%, or meeting or exceeding a threshold of 75%.
  • The acquisition of voting rights that enable the acquirer to secure or prevent the passage of any class of resolution governing the affairs of a qualifying entity.
  • The acquisition of material influence over a qualifying entity's policy.
Unlike the previous system under the Enterprise Act, government intervention in transactions under the NSI Regime is not limited by a minimum turnover or share of supply threshold. A trigger event is also subject to the NSI Regime irrespective of the nationality or place of formation of the acquirer. This means that any transaction involving the acquisition of the entire issued share capital of a target company incorporated in the UK is likely to be a trigger event for the purposes of the NSI Regime.

Key aspects of the NSI Regime

The key features of the NSI Regime include the following:
  • Mandatory notification regime. Certain trigger events involving the acquisition of control (including indirect control) over shares in companies undertaking specified activities in the UK in certain sensitive sectors of the economy (namely civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; advanced robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; synthetic biology; critical suppliers to government; suppliers to the emergency services; military and dual-use technologies; and satellite and space technology) are subject to a mandatory notification requirement, and may not proceed unless cleared by the government (with the Secretary of State in the Cabinet acting as the decision-maker). A mandatorily notifiable transaction that is completed without approval will be void and of no legal effect (although the NSI Act does include a mechanism enabling the retrospective validation of a notifiable acquisition in certain circumstances). Additionally, the acquirer may be subject to criminal or civil penalties for completing the transaction without obtaining prior clearance. The precise definitions of the different sectors, and the particular activities within them, that are subject to the mandatory notification regime are specified in Schedules 1 to 17 to the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (SI 2021/1264). For further information, see Practice notes, National Security and Investment Act 2021: overview: Mandatory notification regime and National Security and Investment Act 2021: mandatory notification regime.
  • Voluntary notification. Trigger events that do not meet the criteria for mandatory notification can be notified on a voluntary basis if the parties consider that the transaction may raise national security concerns. For further information, see Practice note, National Security and Investment Act 2021: overview: Voluntary notification regime.
  • Notification process. Transaction notifications (both mandatory and voluntary) must be made to the Investment Security Unit (ISU) via a customised electronic portal, and include prescribed information specified by secondary legislation (see Drafting note, Notification process under NSI Act).
  • Power to review transactions. The Secretary of State has the power to call in for review any trigger event (whether or not notified) where they reasonably suspect that there is (or could be) a risk to national security as a result of the transaction. For non-notified transactions, a call-in notice may be issued at any time while the transaction is in progress or contemplation, or within six months of the Secretary of State becoming aware of the transaction, provided this occurs within five years of the transaction completing. The five-year time limit does not apply where the acquirer fails to notify a transaction that is within the mandatory notification regime.
  • Retroactive call-in power. The Secretary of State can exercise the call-in power in relation to any trigger event that took place on or after 12 November 2020. However, for transactions that completed between 12 November 2020 and 3 January 2022, the call-in period is reduced to six months from commencement if the Secretary of State became aware of the transaction (for example, through national press coverage or direct communications from the parties) prior to the commencement date.
  • Transaction review process. Where a transaction is proactively notified either under the mandatory or voluntary notification regime, the Secretary of State must decide within 30 working days whether to clear or call in the transaction for a detailed national security assessment. The timetable for the initial review does not start to run until the Secretary of State confirms that the notification has been accepted. If a call-in notice is issued (whether following notification or otherwise), the Secretary of State has a 30- working day screening period (extendable by an additional 45 working days in certain circumstances) in which to carry out a full national security assessment. This means that the overall statutory review period is potentially up to 105 working days, although a longer period is also possible in practice if, for example, requests for further information are issued (which have the effect of pausing the statutory timetable), or if the Secretary of State and acquirer agree a voluntary period for further scrutiny after the additional 45 working day period ends.
    During the review period, the Secretary of State may issue interim orders to reverse or prevent any action (such as completing a transaction or integrating the target) that could prejudice the Secretary of State's functions under the NSI Regime (for further information, see Practice note, National Security and Investment Act 2021: overview: Interim orders).
  • Outcome of review process. Following a detailed national security assessment, the Secretary of State must either notify the parties that no further action will be taken in relation to the transaction, or, where a national security risk has been identified, make a final order imposing necessary and proportionate remedies (which could include imposing conditions, or blocking or unwinding the transaction) for the purpose of preventing, remedying or mitigating that risk. Breach of any requirement in a final order may lead to a civil or criminal sanction. For further information, see Practice note, National Security and Investment Act 2021: overview: Outcome of national security assessment.

When may a national security review condition be required?

Transactions falling within the mandatory notification regime under the NSI Act are subject to a standstill obligation that prevents completion unless the Secretary of State has cleared the transaction, and will be legally void if closed without obtaining the requisite clearance. Other penalties for an acquirer's breach of the mandatory notification requirement include:
  • Up to five years' imprisonment for individuals.
  • Fines of up to 5% of the acquirer's group worldwide turnover, or £10 million (whichever is higher).
Therefore, if the transaction is caught by the mandatory notification requirement, it will be important for the conditions in the SPA to reflect the potential legal bar on completion under the NSI Regime, and to protect the parties from any obligation to complete the transaction unless and until they are legally permitted to do so.
When does the mandatory notification regime apply?
Share purchases meeting the following criteria are subject to the mandatory notification obligation under the NSI Act:
  • The target (or a member of its group which is held through an unbroken chain of majority stakes) undertakes certain statutorily defined activities in the UK in one of the sensitive sectors of the economy that are specified in the Schedules to the National Security and Investment Act 2021 (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (SI 2021/1264) (namely: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; advanced robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; synthetic biology; critical suppliers to government; suppliers to the emergency services; military and dual-use technologies; and satellite and space technology).
  • As a result of the transaction, the buyer will gain control of the target company by: (i) increasing the percentage of shares or votes that it holds to more than 25%, more than 50% or to 75% or more; or (ii) acquiring voting rights enabling it to secure or prevent the passage of any class of resolution governing the target company's affairs.
For further information on when the mandatory notification regime applies, see Practice notes, National Security and Investment Act 2021: overview: Mandatory notification regime and National Security and Investment Act 2021: mandatory notification regime and Notifiable acquisitions under the National Security and Investment Act 2021: flowchart.
For a detailed questionnaire that aims to elicit relevant information to assist in assessing whether the target company's activities bring it within the scope of the mandatory notification regime, see Standard document, National Security and Investment Act 2021: notifiable acquisition screening questionnaire.
SPA conditional on notification under voluntary regime?
Where a transaction does not meet the criteria for mandatory notification, the parties are not obliged to notify or obtain clearance from the Secretary of State before implementing the deal. However, if they consider that the transaction could nevertheless raise national security concerns and may be called-in for scrutiny as a result, the transaction can be notified for clearance on a voluntary basis (see Practice note, National Security and Investment Act 2021: overview: Voluntary notification regime).
As the Secretary of State has wide powers to call in for investigation (either before or potentially up to five years after completion) any non-notified transaction that is considered to present a potential risk to national security, in the interests of certainty and to neutralise the post-completion call-in risk, the buyer may want to consider making the SPA conditional on obtaining clearance through the voluntary notification procedure.
In practice, reaching a decision as to whether a voluntary notification should be submitted (and the SPA made conditional on this process and its outcome) is likely to involve the making a substantive assessment of the risk of the transaction being called in for review, and weighing this against the possible impact of the notification and review process on the deal timetable, as well as the seller's appetite for pursuing the transaction with the buyer. In auction sales in particular, potential buyers will need to consider carefully whether tabling an offer which is conditional on obtaining national security clearance through the voluntary notification regime will put them at a competitive disadvantage compared to other bidders.
If the seller is prepared in principle to accept a condition that extends to notifying and obtaining clearance under the voluntary notification regime, it should consider seeking to ensure that the condition is waivable (by one or both parties). This would mean that if clearance has not been received prior to the intended completion date, the seller could push for the condition precedent to be waived. However, this is unlikely to be acceptable to the buyer if there is any indication that the Secretary of State is considering calling the transaction in for a detailed national security assessment.
Call-in without notification
In circumstances where the parties consider that it is unnecessary to formally notify the transaction (either on a mandatory or voluntary basis), the buyer may nevertheless want to consider including a condition that addresses the possibility of the Secretary of State initiating a national security review prior to completion by issuing a call-in notice in relation to the transaction. For example, completion could be expressed as being conditional on no call-in notice being issued before completion, or (if the parties are content for completion to be delayed while any ensuing national security assessment takes place) the transaction is cleared to proceed following call-in.

Scope of the condition

The condition in this Paragraph 2 is drafted to apply where:
  • It is necessary (or desirable) to notify the transaction for clearance under the NSI Regime.
  • The transaction will be notified after the SPA has been exchanged.
The condition seeks to address each of the possible outcomes following notification (or call-in without prior notification) under the NSI Regime. In particular:
  • Following notification, the Secretary of State could clear the transaction during an initial 30-working day screening period without issuing a call-in notice (see Paragraph 2.2(a)).
  • The Secretary of State could issue a call-in notice (whether following a notification or acting of their own volition) requiring a detailed national security assessment of the transaction (see Paragraph 2.2(b)). In relation to a notified transaction, the Secretary of State must decide whether to clear the transaction or issue a call-in notice within 30 working days of confirming that the notification has been accepted.
  • After calling in a transaction for a comprehensive national security review, the Secretary of State may either:
    • clear the transaction by notifying the parties that no further action will be taken (see Paragraph 2.2(b)(i)); or
    • where the Secretary of State is satisfied that the transaction would give rise to a national security risk, make a final order for the purpose of preventing, remedying or mitigating that risk. Aside from blocking the transaction altogether, a final order may require remedies to address identified national security concerns in order to allow the deal to proceed (see Paragraph 2.2(b)(ii)), such as altering the number of shares the buyer can acquire, restricting access to confidential information or controlling access to certain operational sites or works.
The parties will need to consider whether it is appropriate for the condition to be satisfied in each of these scenarios. For example, if either party is unwilling to proceed in the event that the transaction is called in for a full national security review, Paragraph 2.2(b) should be omitted.

Negotiating and drafting issues

General buyer issues

  • Given the wide range of transactions that are potentially subject to review under the NSI Regime, and the absence of any jurisdictional or financial safe harbours, buyers should conduct, at an early stage in the transaction process, a thorough self-assessment of whether the proposed transaction could give rise to national security concerns under the NSI Regime. When making this assessment, businesses are encouraged to have regard to the government's statutory statement under section 3 of the NSI Act which describes how the Secretary of State expects to use the call-in power under the NSI Regime, and the three risk factors (target risk, control risk and acquirer risk) that will be considered when deciding whether to exercise the power (for further information, see Practice note, National Security and Investment Act 2021: overview: Section 3 statement. In addition, to assist in mitigating uncertainty where questions arise as to the potential application of the relatively new regime to a proposed transaction, buyers may seek informal advice from the ISU via [email protected].
  • If the buyer's initial self-assessment indicates that the transaction is subject to the mandatory notification requirement under the NSI Act, or there is otherwise a substantive risk of government intervention on national security grounds, the buyer will need to carefully consider how this should be factored into the SPA conditions and the transaction timetable. Given the technical complexity of the definitions of some of the sectors that are within the mandatory notification regime and the lack of clarity or established precedent surrounding the circumstances in which the government is likely to exercise its call-in powers, it may be advisable for buyers to err on the side of caution when considering the nature and scope of the condition that may be required if there is any doubt as to whether the transaction involves national security concerns.
  • If an NSI Regime review condition is included in the SPA, the buyer should ensure that it reflects only those possible outcomes under the regime that will be acceptable to it for the transaction to proceed. For example, the buyer may only be prepared to proceed if the Secretary of State clears the transaction at the first stage following notification. The buyer should also ensure that the conditions protect it from being required to complete the transaction on terms that are not satisfactory to it where, for example, the Secretary of State will only clear the transaction subject to remedies.
  • While the NSI Act envisages that the acquirer will be responsible for making the notification required under the mandatory regime, some input from the seller is likely to be required. The buyer will also want to ensure that it maintains control of contact with the ISU, and of the clearance process generally. It may therefore be appropriate to include an express contractual provision requiring the seller to co-operate, to provide all reasonable assistance and to ensure that it informs the buyer of any contact with the authorities (possibly in advance) and provides copies of all information given to the ISU (subject to not exchanging commercially sensitive information).
  • Ensure the agreed longstop date accommodates the statutory timetable for notifying and clearing the transaction under the NSI Regime, including (where appropriate) carrying out a full national security review. The period from notification to completion of a full national security review could be up to 105 working days, although the overall review period could also be longer than this in practice if, for example, requests for further information are issued (which will have the effect of pausing the statutory timetable), or if the Secretary of State and acquirer agree a voluntary period for further scrutiny. For further information, see Practice note, National Security and Investment Act 2021: overview: Timeframe for exercising call-in power and Timetable for assessment.

General seller issues

  • If the transaction is outside the scope of the mandatory notification regime, and no obvious national security concerns have been identified through self-assessment at the outset, it is likely to be in the seller's interests to resist the inclusion of a national security review condition precedent.
  • If some form of NSI Act-related condition is accepted, consider implementing strategies to mitigate the risk of the transaction being derailed due to government intervention, such as:
    • seeking to ensure that the buyer does not have complete discretion to walk away if the Secretary of State requires remedies for the transaction to proceed; and/or
    • agreeing a break fee that becomes payable if the SPA is terminated due to a failure to satisfy the NSI review condition.
  • The seller should consider whether it wishes to pursue the transaction with the proposed buyer if it is subject to heightened national security risk, and it is likely that the transaction will be called in for review as a result. If a full national security assessment is implemented, the seller may be required to participate in the Secretary of State's investigation which, as well as involving additional management time and expense, could also delay completion and may prevent the seller from pursuing other sale opportunities that could be completed more quickly.
  • Consider the extent to which the longstop date should accommodate the statutory timetable for notifying and clearing the transaction under the NSI Regime. The period from notification to completion of a full national security review could be up to 105 working days, although the overall review period could also be longer than this in practice if, for example, requests for further information are issued (which will have the effect of pausing the statutory timetable), or if the Secretary of State and acquirer agree a voluntary period for further scrutiny. For further information, see Practice note, National Security and Investment Act 2021: overview: Timeframe for exercising call-in power and Timetable for assessment.
  • Ensure the SPA includes an express obligation on the buyer to make the requisite notification in respect of the Transaction promptly or within a specified timeframe after the SPA is exchanged (see, for example, Clause 1.1(a)). This will help in ensuring that the clock starts running as soon as possible on the statutory timetable for clearing or calling in the Transaction, and avoiding the risk that the NSI review condition is not satisfied before the longstop date purely because the buyer has failed to notify in a timely manner.
2.1In this Paragraph 2, a call-in notice means a notice given by the Secretary of State under section 1(1) of the NSI Act.
2.2Either:
(a)following the notification of the Transaction in accordance with the requirements of the NSI Act and this agreement, the Secretary of State notifying the Buyer pursuant to section [14(8)(b)(ii) OR 18(8)(b)(ii)] that no further action will be taken in relation to the Transaction; or
Note: Transaction cleared following notification
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Transaction cleared following notification

This condition addresses the possibility of the transaction being cleared by the Secretary of State following notification without requiring a full national security assessment to be undertaken.
Where a transaction is proactively notified (either under the mandatory or voluntary notification regime), the Secretary of State must decide within 30 working days whether to clear or call in the transaction for a detailed national security assessment (sections 14(8)-(9) and 18(8)-(9), NSI Act). The 30 working day review period will not start to run until the Secretary of State confirms its acceptance of the notification. The Secretary of State can reject a notification for a number of reasons, including where insufficient information has been provided.
For further information on the notification procedure, see Drafting note, Notification process under NSI Act.

Negotiating and drafting issues

  • Include the reference to section 14(8)(b)(ii) if the notification is made under the mandatory notification regime. If the notification will be made under the voluntary regime, include the reference to section 18(8)(b)(ii).
  • The seller should ensure that the SPA includes an obligation on the buyer to prepare and submit the requisite notification promptly, or within a specified period after the SPA is exchanged (see, for example Clause 1.1(a)).
  • While the buyer will have primary responsibility for making a mandatory notification under the NSI Regime (see Drafting note, Which party is responsible for the NSI condition?), some input from the seller is likely to be required. The buyer will also want to ensure that it maintains control over any contact with the ISU, and of the clearance process generally. It may therefore be appropriate to include an express contractual provision requiring the seller to co-operate, to provide all reasonable assistance and to ensure that it informs the buyer of any contact with the authorities (possibly in advance) and provides copies of all information provided (subject to not exchanging commercially sensitive information).
  • Sellers may expect a contractual right to be kept fully informed, to be given the opportunity to comment on the notification and to be provided with sufficient information to monitor that the notification process is being handled effectively (see, for example, Clause 1.1(c)).
  • Ensure the longstop date for satisfying the conditions accommodates the statutory assessment period (that is, 30 working days) within which the Secretary of State must either clear or call-in the transaction following notification.
(b)in the event that a call-in notice is given in relation to the Transaction, the Secretary of State[ either:]
Note: Transaction called in for a full national security assessment
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Transaction called in for a full national security assessment

This Paragraph 2.2(b) caters for the possibility that the transaction may be called in for a detailed national security assessment. It provides for the transaction to proceed if it is cleared at the end of the assessment process, either unconditionally (see Paragraph 2.2(b)(i)) or, if Paragraph 2.2(b)(ii) is included, subject to remedies.
A call-in notice could be issued following notification of the transaction by the buyer, or prior to such notification by the Secretary of State acting of their volition.
If a call-in notice is issued (following notification or otherwise), the Secretary of State has an initial 30-working day screening period (extendable by an additional 45 working days in certain circumstances) in which to carry out a full national security assessment. This means that the statutory timetable for review following a call-in notice is potentially up to 75 working days, although the overall review period could be longer than this in practice if, for example, requests for further information are issued (which have the effect of pausing the statutory timetable), or if the Secretary of State and acquirer agree a voluntary period for further scrutiny after the additional 45 working day period ends.
During the review period, the Secretary of State may issue an interim order preventing implementation of the transaction or any further integration of the target group, pending the outcome of its review, where it considers that there is a risk that such action might prejudice the ability of the Secretary of State to impose remedies if required.

Negotiating and drafting issues

  • The question of whether the condition precedent should extend to cover the possibility of call-in powers being exercised in relation to the transaction will be an issue for negotiation between the parties.
  • Both parties should carefully consider whether they are prepared to incur the additional time, expense and management commitment of a detailed national security assessment, or whether they wish to retain the option to walk away from the deal if clearance is not obtained at the earliest stage following notification.
  • If the parties have agreed that the transaction will fail if it is called in for a detailed national security review, this condition will not be appropriate and should be omitted.
  • Where a transaction is proactively notified (whether under the mandatory or voluntary notification regime), the Secretary of State must decide within 30 working days of the notification being accepted whether to call the transaction in for a detailed national security assessment. To ensure the clock starts to run on the statutory timetable as soon as possible (and to minimise the scope for the buyer to avoid satisfaction of the condition by delaying submission of the notification), the seller should ensure that the SPA includes an obligation on the buyer to prepare and submit the requisite notification promptly, or within a specified period after the SPA is exchanged (see, for example, Clause 1.1(a)).
  • If the parties are prepared in principle to proceed (where permitted) after call-in, consider whether the longstop date for completion will need to be extended to take account of the statutory timetable for completing the national security assessment.
(i)
giving a final notification confirming that no further action will be taken in relation to Transaction under the NSI Act[; or]
(ii)
[making a final order permitting the Transaction to proceed subject only to such remedies or requirements that are in all respects acceptable to the Buyer, and such order not being revoked or varied before Completion].
Note: Clearance granted subject to remedies (optional clause)
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Clearance granted subject to remedies (optional clause)

Other than approving or blocking the transaction, the Secretary of State may require remedies to address identified national security concerns in order to allow a deal to proceed. The government has identified altering the number of shares an investor is permitted to acquire, restricting access to commercial information or controlling access to certain operational sites or works as possible examples of remedies that might be imposed in some situations.
This optional paragraph therefore caters for the possibility of the transaction being cleared following a detailed national security assessment subject to remedies. It should only be included where the buyer is willing, in principle, to proceed with the transaction subject to acceptable remedies.

Negotiating and drafting issues

  • Where included, the buyer should ensure the drafting in this paragraph protects it from being forced to proceed with the transaction in circumstances where the Secretary of State will only clear the transaction subject to remedies that the buyer considers to be unacceptable. For instance, remedies could be unacceptable due to their impact on the buyer’s existing business, or because they undermine the commercial or financial rationale for entering into the transaction in the first place. As drafted, this paragraph seeks to maximise the buyer's discretion by requiring that for the condition to be satisfied, any remedies imposed must be acceptable to the buyer in all respects.
  • The seller should try to ensure that the buyer does not have complete discretion to walk away from the transaction in the event that the Secretary of State imposes remedies that the buyer considers to be unacceptable. It may be useful to determine in advance objective thresholds or parameters for remedies that the buyer will accept and, at the very least, to require that the buyer act reasonably in making its determination. Alternatively, the seller could consider seeking to incorporate a break fee that will be payable by the buyer if it withdraws from the transaction because it is not willing to accept the remedies imposed following a detailed national security assessment under the NSI Regime.
3.Merger control consents and clearances
Note: Merger control consents and clearances
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Merger control consents and clearances

The possible merger control implications of the transaction should be examined as early as possible in the parties' negotiations so that the following issues can be established in particular:
  • Whether the transaction falls within the scope of the merger control rules of any jurisdiction and, if so, which ones.
  • Whether any applicable merger control rules require compulsory notification prior to completion, and what the timing implications are.
  • Whether, even if prior merger control clearance is not compulsory, it is sensible to make a voluntary notification to obtain certainty that the transaction will not be examined following completion.
  • Whether the transaction raises any substantive competition concerns, such that there is a risk of it being blocked by the relevant competition authority, or only permitted subject to conditions.
These factors will determine what (if any) merger control conditions should be included in the SPA. In practice, however, there may not be the time or the information available for a full merger control assessment to be made prior to signature and exchange of a conditional SPA. In such circumstances, the completion conditions should reflect the possible alternatives.
For general information on merger control issues arising in the context of a share acquisition, see Practice notes:

Jurisdiction issues

The merger control rules to consider in transactions involving UK companies are contained in Part 3 of the Enterprise Act 2002 (the Enterprise Act).
However, it is important to bear in mind that even if the parties' businesses are based principally in the UK, it is still possible for the transaction to be caught by the merger control rules of other jurisdictions where they have a reasonable level of sales, notable market positions or any assets, in particular the European Union (EU).
Mergers that satisfy the EU notification thresholds must be notified to the European Commission, which has exclusive jurisdiction to review that merger within the EU (known as the "one-stop-shop" principle) (see Regulation 139/2004 on the control of concentrations between undertakings (OJ 2004 L24/1) (the EU Merger Regulation)). The EU merger control system applies regardless of the nationality or country of incorporation, or where the headquarters of an undertaking are located. For further information on when a transaction will be subject to EU merger control, see Practice note, Transactions and practices: EU Mergers & acquisitions: Mergers and acquisitions subject to EU merger control. (As of 11.00pm on 31 December 2020, the EU Merger Regulation was revoked in the UK (see further, Drafting note, Merger control and Brexit).)
If the transaction involves companies that are involved in certain sectors, or if it raises other public interest issues, then separate rules relating to the handling of the merger may also apply in the UK, EU and in other jurisdictions, and the relevant conditions precedent will need to be revised accordingly (for further information, see Practice note, Transactions and practices: UK Mergers and acquisitions: Secretary of State’s powers to intervene in cases under the Enterprise Act and Special sectors). See also Drafting note, National security review, below
The buyer should therefore conduct a thorough assessment of the merger control issues as early as possible to identify the relevant jurisdictions, as well as the extent of any substantive competition issues.

Stages of UK merger investigation

There are potentially two stages to the investigation where a transaction falls to be considered under the Enterprise Act. While most cases are cleared within the first stage investigation, transactions that raise serious competition concerns can be referred by the Competition and Markets Authority (CMA) for a Phase 2 investigation.
A second-phase investigation will substantially increase the delay before completion (by six to eight months) and will involve the parties in considerable additional work.

Notification under the Enterprise Act is voluntary

Notification of a transaction under the Enterprise Act in the UK is voluntary, in that there is no statutory requirement to notify the CMA before the transaction takes place. However, if a transaction meets the jurisdictional thresholds under the Enterprise Act (for further information on these thresholds, see Practice note, Transactions and practices: UK Mergers and acquisitions: Relevant merger situation) but the parties do not notify, the CMA can open an investigation on its own initiative, and a decision not to notify the CMA in cases where a transaction raises substantive competition issues carries particular risks. The CMA will normally make interim orders, which prevent any action (for example integrating the merging businesses) that may prejudice or impede its investigation. These remain in force until the transaction is cleared or remedial action is taken. If the CMA has reasonable grounds to believe that the parties to a completed merger are integrating their businesses, it can require that this integration is unwound.
Following a Phase 2 investigation, the CMA may also require termination of a completed transaction through disposal of the acquired businesses or assets (or otherwise remedied). Any such forced sale is more likely to be at a discount to market value or on otherwise unfavourable terms.

Co-operation in the notification process

The buyer will generally have primary responsibility for making any notification to the relevant competition authority (such as the CMA where the Enterprise Act regime applies to the transaction), but it will require significant input from the seller. It will also want to ensure that it maintains control of contact with the relevant competition authority and of the clearance process. Therefore, it may be appropriate to include an express contractual provision requiring the seller to co-operate, to provide all reasonable assistance, to ensure that it informs the buyer of any contact with the authorities (possibly in advance) and provides copies of all information given to the relevant competition authority (subject to not exchanging commercially sensitive information).
Although the seller may be happy for the buyer to take the lead in the notification process it will, at very least, usually want to ensure that it is kept fully informed, given the opportunity to comment and has sufficient information to monitor that the notification process is being handled effectively. It may therefore require an express contractual provision imposing these obligations on the buyer.
Note: Merger control and Brexit
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Merger control and Brexit

The UK left the EU on 31 January 2020. Under the UK-EU withdrawal agreement, a transition period ran until 31 December 2020 (end of transition period) throughout which the UK was treated for most purposes as if it were still an EU member state, and most EU law (including as amended or supplemented) continued to apply to the UK (for further information, see Practice note, UK-EU withdrawal agreement: transition text and European Union (Withdrawal Agreement) Act 2020: Transition period). This meant that for most practical purposes, Brexit took effect at the end of the transition period rather than on exit day. During the transition period, there was no change as to which authority had competence to review a merger, and the UK remained subject to the EU merger control regime in the EU Merger Regulation.
With effect from the end of the transition period, the UK ceased to be part of the EU competition system. The main practical impact of this on merger control is that the "one-stop shop" provided by the EU Merger Regulation ceased to apply, such that the CMA is no longer prohibited from investigating mergers with an EU dimension under the EU Merger Regulation. The turnover of parties in the UK is no longer relevant for determining whether a merger satisfies the EU Merger Regulation jurisdictional thresholds. In those circumstances, individual national level filings within the EU may be triggered, depending on whether EU member state level thresholds are met.
Following the end of the transition period, where a merger satisfies the jurisdictional thresholds of the EU Merger Regulation and the Enterprise Act 2002, the CMA and the European Commission will conduct parallel assessments of the same merger in their respective jurisdictions.
For cases that were ongoing as at the end of the transition period, the competent EU or UK authority retained jurisdiction over the case. The UK-EU withdrawal agreement set out the mechanism for deciding whether a case was "initiated" under the EU Merger Regulation within the transition period, and therefore not subject to review by the CMA.
The treatment under the UK-EU withdrawal agreement of merger cases that were "live" at the end of the UK-EU transition period is considered in Brexit checklist: Live merger and competition investigations at the end of the transition period.
For more detailed information on the key implications for UK merger control arising from the UK’s exit from the EU, see Practice note, Brexit: implications for UK merger control.
The drafting of the UK and EU merger conditions in Paragraph 3.1 and Paragraph 3.2 reflects the position after the end of the transition period.
Note: EU Foreign Subsidies Regulation
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EU Foreign Subsidies Regulation

For transactions with an EU nexus, the parties will need to consider the possible impact of the Foreign Subsidies Regulation (2022/2560/EU) (FSR) alongside the EU Merger Regulation, national merger control regimes and foreign direct investment reviews and other relevant national regimes of the member states.
The FSR provides the European Commission with new investigatory and enforcement powers which enable it to identify and tackle the potential distortive effects of subsidies granted by non-EU countries. In particular, the FSR imposes mandatory notification and approval requirements for M&A transactions (including acquisitions, mergers and joint ventures) and public tender processes, and enables the Commission to conduct ex officio investigations into potentially problematic foreign subsidies. Broadly, the FSR will be engaged in corporate transactions where two thresholds are met:
  • The target (or, where applicable, the merging businesses or joint venture) is established in the EU and has EU turnover of at least EUR500 million.
  • The undertakings concerned (that is, in a share purchase context, the acquirer and target) received combined financial contributions from non-EU states exceeding EUR50 million in the last three years.
For further information on the FSR, see Practice note, The EU Foreign Subsidies Regulation.
For a condition precedent for use where the transaction must be notified under the FSR, see Standard clause, EU Foreign Subsidies Regulation: standard clause conditions precedent to completion and warranty: clause 1 (Condition to completion: EU Foreign Subsidies Regulation).
3.1EU merger control clearance
Note: EU merger control clearance
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EU merger control clearance

If the EU Merger Regulation applies to the transaction, no other EU national merger control rules will apply (although this does not preclude the possible application of the merger control rules outside the EU, including the UK (see Paragraph 3.2)).
Transactions caught by the EU Merger Regulation must be notified to the European Commission and, in most cases, the parties will not be able to put the transaction into effect until it has been approved by the European Commission.

Does the EU Merger Regulation apply?

Any concentration within the meaning of the EU Merger Regulation, which has an EU dimension, must be notified to the European Commission for approval before being implemented.
For further information on the EU merger control regime, when it applies and the procedure involved, see Practice notes:
If there are competition concerns in relation to the transaction, and the jurisdictional analysis has not been completed before the SPA is exchanged, it is advisable to include both an EU condition precedent and a UK (and any other relevant jurisdiction) merger control condition precedent (see Paragraph 3.2 and Paragraph 3.3).

Article 22 referrals to Commission from members states

On 26 March 2021, the European Commission issued new guidance, with immediate effect, on when it will accept referrals of merger control reviews from EU national competition authorities *for background, see Legal update, Commission evaluation of procedural and jurisdictional aspects of EU merger control, guidance on the application on Article 22 of the EU Merger Regulation and consultation on policy options for further simplification: Article 22 Guidance). Article 22 of the EU Merger Regulation allows one or more EU member states to request that the European Commission examine a concentration that does not have an EU dimension (that is, does not meet the turnover thresholds specified in the EU Merger Regulation). A referral request may be made where a relevant transaction affects trade between member states and threatens to significantly affect competition within the member state(s) making the request, even if the transaction falls below the relevant national merger control thresholds.
When assessing the potential application of the EU Merger Regulation to their transaction, parties must, therefore, not only assess the worldwide, EEA and national turnovers of the buyer and the seller to decide whether their transaction will require prior merger approval, but also make a substantive assessment of whether their transaction may have a significant impact on existing or potential competition within the EU. Relevant considerations for deciding whether a transaction threatens to significantly affect competition include:
  • The creation or strengthening of a dominant position of one of the parties.
  • The elimination of a recent or future market entrant.
  • The merger between two important innovators.
  • The reduction of competitors' ability or incentive to compete.
Where the concentration is not notifiable in the referring member state, the Commission considers it will normally be appropriate for a referral where the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential. Acquisitions involving digital, pharmaceutical and biotechnology companies, start-ups and nascent competitors may be particularly vulnerable to an Article 22 referral.
If the European Commission informs the parties that a referral request has been made, the parties must not implement the transaction until the Commission decides to reject the referral request or, if it accepts it, until it clears the merger. However, until the Commission does inform them of a referral request, the parties can complete, albeit with the risk that the Commission could subsequently block the merger and require the parties to unwind the transaction.
It should be noted that a referral request under Article 22 can even be made after a transaction has closed. Although the European Commission's guidance states that it will generally not consider a referral appropriate if six months has passed after the implementation of the concentration, it does allow for later referrals in exceptional cases. Further, if the implementation of the concentration was not in the public domain, the period of six months would run from the moment when material facts about the concentration have been made public in the EU.
If there is a risk of referral, the parties should consider whether to contact national competition authorities and/or the European Commission for some clarity as to the likelihood of referral.
The parties should also be aware that third parties may contact the European Commission or national competition authorities and inform them of a concentration that, in their opinion, could be a candidate for a referral under Article 22, raising the prospect of corporate rivals using the Article 22 process to derail the transaction.
These considerations and the process of referral will all take time. The parties should consider whether the longstop date for completion should be extended, or the possibility for its renegotiation provided for.

Purpose and scope of EU merger control conditions

Including an EU merger control condition precedent in the SPA serves the following purposes:
Whether or not protection through EU merger control conditions is required will depend on the nature of the transaction and whether it raises substantive competition concerns. The extent to which each party receives the desired protection will be a matter for negotiation.
The conditions set out in this Paragraph 3.1 cover the main stages of the European Commission review procedure, namely:
  • A transaction can be cleared unconditionally at the end of the first phase of investigation (Phase I) (Article 6(1)(b), EU Merger Regulation).
  • It can be cleared subject to conditions at the end of Phase I (Article 6(2), EU Merger Regulation).
  • Proceedings can be opened at the end of Phase I and a second phase investigation (Phase II) commenced (Article 6(1)(c), EU Merger Regulation).
  • It can be cleared unconditionally at the end of the Phase II investigation (Article 8(2), EU Merger Regulation).
  • It can be cleared conditionally at the end of Phase II (Article 8(2), Merger Regulation).
  • The transaction can be prohibited at the end of Phase II (Article 8(3), EU Merger Regulation).
  • All or part of the transaction can be referred to one (or several) member state competition authorities for investigation under national competition laws (and it can then be cleared, cleared on conditions or blocked). If the European Commission retains any part of the transaction then it can reach any of the above decisions in respect of it (Article 4(4) and Article 9, EU Merger Regulation).
  • The transaction can be referred by an EU national competition authority to the European Commission for investigation under the EU Merger Regulation (following which it can cleared, cleared on conditions or blocked) even if it falls below the EU Merger Regulation and national merger control thresholds (Article 22, EU Merger Regulation).
Not all the provisions in this Paragraph 3.1 will be appropriate for every transaction. In the simplest cases, when it is highly unlikely that proceedings will be initiated, or that the European Commission will seek remedial undertakings, then it may only be necessary to include the first condition in Paragraph 3.1(a). For instance, this may be the case when the acquisition is notified to the European Commission under the simplified procedure (see Practice note, Transactions and practices: EU Mergers & acquisitions: Simplified procedure for certain concentrations). Similarly, if it has been agreed that the transaction will fail if Phase II proceedings are initiated by the European Commission, again, only the first condition will be appropriate.

General issues for the buyer

The buyer should:
  • Conduct a thorough assessment of the merger control issues as early as possible in order to confirm the relevant merger control jurisdiction as well as the extent of any substantive competition issues.
  • Ensure that the conditions protect it from being forced to proceed with a purchase when it is obliged to give undertakings to the European Commission that are unacceptable to it. This may be because of their impact on the buyer’s existing business or because the undertakings undermine the financial rationale for entering into the deal in the first place. The use of indemnities or other mechanisms to adjust the purchase price could be considered in order to protect the buyer’s position.
  • Decide whether it is prepared to undergo the time, expense and management commitment of a lengthy second phase merger control investigation or wishes to retain the option to walk away from the deal if first phase clearance is not obtained.
  • Ensure that the conditions reflect the possible outcome scenarios in any transaction. If there is a possibility that the transaction may be referred from the European Commission to a member state authority (or that such a reference will be requested) (Articles 4(4) and 9, EU Merger Regulation), or that the transaction may be referred to the European Commission by a member state under Article 22 (or that such a reference may be requested), ensure that the appropriate condition is included. If the relevant national authority has been identified, a more detailed condition covering the procedures under the relevant national law may be appropriate.
  • If the transaction involves national security or other public interest issues, the conditions may need to be amended to reflect the possibility that the relevant member state may seek to carry out a parallel investigation (see Drafting note, National security review and Practice note, Transactions and practices: EU Mergers & acquisitions: Legitimate interests and National security).
  • The buyer generally has primary responsibility for making the notification to the European Commission but will require significant input from the seller. It will also want to ensure that it maintains control of contact with the European Commission and of the clearance process. It may therefore be appropriate to include an express contractual provision requiring the seller to co-operate, to provide all reasonable assistance and to ensure that it informs the buyer of any contact with the European Commission (possibly in advance) and provides copies of all information given to the European Commission.

General issues for the seller

The seller should:
  • Consider whether it wishes to proceed with a transaction with a buyer who has competition problems and where there is a likelihood that there will be a second phase investigation. The seller will be required to participate in any such investigation by the competition authorities and not only will it involve management time and expense, but it will delay completion and may prevent the seller from pursuing other sale opportunities which could be completed more quickly.
  • Consider whether it wishes to proceed with a transaction where there is a risk of a referral to the European Commission under Article 22 of the EU Merger Regulation, even though the transaction does not meet the otherwise applicable notification thresholds. The seller may also consider requiring the buyer to provide a substantive competition analysis on the risk of referral. To mitigate the risk to the seller, it could also consider seeking a hell or high water clause requiring the buyer to take the necessary steps to achieve clearance, including offering remedies, or a reverse break fee clause, under which a break fee becomes payable to the seller if the buyer is unable to secure regulatory approval by a specified date.
  • Seek to ensure that the buyer does not have complete discretion to walk away from the deal where the European Commission requires reasonable undertakings. It may be useful to determine in advance the thresholds for undertakings which the buyer will find acceptable and to require that the buyer act reasonably in making such a determination.
  • Although the seller may be happy for the buyer to take the lead in the notification process it will, at very least, want to ensure that it is kept fully informed, is given the opportunity to comment and has sufficient information to monitor that the notification process is being handled effectively. It may therefore require an express contractual provision imposing these obligations on the buyer.
Where the Transaction constitutes a concentration with a Community dimension within the meaning of Council Regulation (EC) No. 139/2004, [or the Transaction does not constitute a concentration with a Community dimension within the meaning of Council Regulation (EC) No. 139/2004 but has been referred to the European Commission under Article 22 of Council Regulation (EC) No. 139/2004,] [ either:]
(a)[the Buyer receiving confirmation from the European Commission in terms satisfactory to it that, despite the Transaction constituting such a concentration, [or having accepted referral of the transaction under Article 22 of Council Regulation (EC) No. 139/2004], the European Commission has decided not to oppose the concentration and has [unconditionally] declared it compatible with the Internal Market][; or]
Note: Phase I clearance
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Phase I clearance

This condition addresses the possibility of the transaction being cleared by the European Commission without commencing a Phase II investigation. For further information, see Practice notes:

Negotiating and drafting issues

Arguably, the wording of this condition is broad enough to allow the condition to be satisfied in the case of conditional clearance. The clearance must be on terms satisfactory to the buyer. Therefore, if a condition is satisfactory to the buyer then the conditions will be satisfied. However, the buyer may be able to maintain that the imposition of conditions is, in itself, unsatisfactory and that a conditional clearance does not fulfil the relevant condition.
To avoid any doubt about whether a conditional clearance would be satisfactory, it may be sensible to include an express condition covering this and/or to add include word "unconditionally" (the seller may, in particular, want clarity on this point).
(b)[the Buyer receiving confirmation from the European Commission in terms satisfactory to it that, despite opening proceedings in relation to the Transaction, the European Commission has [unconditionally] declared it to be compatible with the Internal Market][; or]
Note: Phase II clearance
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Phase II clearance

This condition addresses the possibility of the transaction being referred for an in-depth Phase II investigation. For further information on this process, see:
In anything other than the most clear-cut cases, where there are no competition issues, the question of whether the condition precedent should extend to cover the possibility of a Phase II investigation will be an issue for negotiation between the parties. This paragraph (together with Paragraph 3.1(c)) caters for this eventuality and provides for the transaction to proceed if it is cleared at the end of the Phase II investigation.

Negotiation and drafting issues

  • The buyer will need to carefully consider whether it is prepared to undergo the time, expense and management commitment of a lengthy second phase merger control investigation, or whether it wishes to retain the option to walk away from the deal if Phase I clearance is not obtained.
  • From the seller's perspective, it should consider whether it wishes to proceed to enter into an agreement with the buyer if it is likely that there will be a second phase investigation. The seller will be required to participate in any such investigation, which will inevitably involve additional management time and expense. It will also delay completion and may prevent the seller from pursuing other sale opportunities that could be completed more quickly.
  • If the parties have agreed that the transaction will fail if there is a Phase II investigation, it will not be appropriate to include this condition.
  • Arguably, the wording of this condition is broad enough to allow the condition to be satisfied in the case of conditional clearance. The clearance must be on terms satisfactory to the buyer. Therefore, if a condition is satisfactory to the buyer then the conditions will be satisfied. However, the buyer may be able to maintain that the imposition of conditions is, in itself, unsatisfactory and that a conditional clearance does not fulfil the relevant condition. To avoid any doubt about whether a conditional clearance would be satisfactory, it may be sensible to include an express condition covering this and/or to add include word "unconditionally") (the seller may, in particular, want clarity on this point).
(c)[the Buyer receiving confirmation from the European Commission that the Transaction will be declared to be compatible with the Internal Market [and proceedings will not be initiated OR, whether before or after initiating proceedings,] on the condition that the Buyer gives certain specified undertakings to the European Commission, and the terms of those undertakings are in all respects satisfactory to the Buyer][,
Note: Clearance subject to undertakings
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Clearance subject to undertakings

Formal undertakings (also referred to as "commitments") may be given by the parties to meet specific competition objections raised by the Commission in the investigation, thereby facilitating clearance of the transaction. Undertakings can be given either at Phase I, so that the Commission does not have to launch a Phase II investigation, or during the Phase II investigation. For further information, see Practice notes:

Negotiating and drafting issues

  • The buyer may be prepared to accept reasonable undertakings as a means of avoiding the initiation of Phase II proceedings, but it may not be prepared to undergo a full Phase II investigation. This paragraph therefore provides alternate wording to be used where this condition relates only to Phase I undertakings (that is, include the words "and proceedings will not be initiated" and delete "whether before or after initiating proceedings").
  • If the initial competition assessment indicates that it may be necessary to offer undertakings to the European Commission in order that the transaction be approved (whether in Phase I or Phase II) then it may be sensible for this condition to be negotiated more carefully to determine whether the buyer should have sole judgment on whether the undertakings are satisfactory and acceptable (as in this condition) or whether this should be judged by some objective pre-agreed standard.
  • In cases where it is anticipated that undertakings will be required, it may be appropriate to include additional provisions to determine who should bear the risk of any losses to the value of the target company’s business as a result of any required divestments or other undertakings (that is, whether there should be an adjustment to the purchase price).
[and if the Transaction (or any part of it) has been referred by the European Commission to the government, regulatory body or competition authority of any EU member state, the Buyer receiving confirmation in terms satisfactory to it from that government, regulatory body or competition authority that the Transaction has been approved in accordance with the relevant national legislation].
Note: Referral back to member states
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Referral back to member states

This paragraph covers the situation where one or more of the EU member states has requested that all or part of the acquisition be referred back to it, and the European Commission has accepted the request (Article 9, EU Merger Regulation).
It may be clear at the outset that such a condition is not necessary or appropriate but if there is any risk of such a reference back then it is sensible to expressly cover this eventuality (see also Drafting note, General issues for the buyer).
It should be noted that as such a reference may relate to part of the transaction only, this condition should be included as an "and/or" to the normal European Commission clearance conditions.
This condition precedent could, in theory, be used to cover a situation where a request for referral back is made by the parties under Article 4(4) of the EU Merger Regulation. However, where it is likely that such a request would be made, it would be sensible to include express conditions relating to the countries in relation to which a request has been or will be made.
For further information on this issue, see Practice notes:
OR
[Where the Transaction does not constitute a concentration with a Community dimension within the meaning of Council Regulation (EC) No. 139/2004, the Buyer receiving [in period between the date of this agreement and Completion] confirmation in terms satisfactory to it from the competition [authority OR authorities] of [all EU member states OR [NAMED EU MEMBER STATE]] [and the European Commission] that the Transaction will not be referred to the European Commission under Article 22 of Council Regulation (EC) No. 139/2004].
Note: No referral to Commission under Article 22
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No referral to Commission under Article 22

It may be clear at the outset that such a condition is not necessary or appropriate, but if there is any risk of such a referral to the Commission under Article 22 of the EU Merger Regulation then it is sensible to expressly cover this eventuality (see also Drafting note, Article 22 referrals to Commission from members states).
Parties may consider approaching relevant national competition authorities, making their transaction known to the authority. This will trigger a 15 working-day period within which the member state must decide whether to request a referral to the European Commission. This may give the parties some certainty and allow them to plan for completion, but it may alert an authority to the transaction and risk triggering a referral that might not otherwise have taken place.
Alternatively, or in addition, the parties may approach the European Commission to ask for "comfort" as to whether it is likely to accept (or invite) a referral request by a member state authority. However, there is no set timeline within which the Commission must respond to such an approach.
For further information on this issue, see Practice notes:
3.2UK merger control
Note: UK merger control
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UK merger control

Merging parties in the UK will need to consider whether:
  • The deal is caught by the merger rules set out in the Enterprise Act.
  • It is advisable to file a voluntary notification relating to the transaction with the CMA in the UK.
For further information on when a transaction will be within the scope of the UK merger regime, see Practice notes, Competition: share purchases: Merger situation and Transactions and practices: UK Mergers and acquisitions: Relevant merger situation.
For information on the impact of Brexit on the UK’s merger control regime, see Drafting note, Merger control and Brexit.

Why have a UK merger control condition?

Where a transaction is subject to the UK merger control rules under the Enterprise Act, there is no obligation for the parties to notify the transaction to, or to obtain clearance from, the UK's CMA prior to implementing the transaction. However, the CMA can investigate any transaction, either before or after completion, which it believes falls within its jurisdiction which could have several implications, including the following:
  • Where a transaction is referred for a second phase investigation by the CMA prior to its completion then there is an automatic bar on share dealing.
  • The CMA can seek interim measures preventing the transaction from being completed, or if it has been completed, preventing the acquired business from being integrated (see Practice note, Competition and Markets Authority: merger control procedures: Interim orders).
  • Even before a reference has been made, the CMA can make an order preventing any action from being taken which might prejudice a future reference (such as requiring assets to be kept separate and preventing further integration), and is very likely to do so in relation to completed mergers.
The risk of proceeding to completion without prior CMA clearance principally rests with the buyer. In the absence of any contractual protection, the buyer will bear the risk of ultimately being required to divest the acquired business or give other undertakings if the CMA reaches an adverse finding following an investigation into the transaction.
Including a UK merger control condition precedent therefore has the following purposes:
  • It can protect the buyer from being required to complete the transaction on terms that are not satisfactory to it (for example, where a Phase 2 reference will be made by the CMA unless certain undertakings are given or where, following a reference, the CMA will only permit the acquisition on the condition that the buyer gives certain undertakings).
  • It can protect both parties from a contractual obligation to continue with the transaction where either a public bid lapses or the share-dealing rule comes into effect (that is, when the transaction is a share acquisition and is referred for a Phase 2 investigation prior to completion).
  • It can protect both parties from being required to take part in a lengthy and onerous Phase 2 investigation by the CMA.
Whether or not the protection of a UK competition condition precedent is required will depend on the nature of the transaction and whether it raises substantive competition concerns. The extent to which each party receives the desired protection will be a matter for negotiation between them.

Scope of the UK merger control conditions

The sample conditions in the paragraph below cover the main stages of the UK merger control procedure.
Paragraph 3.2(a) deals with determining whether the transaction is capable of falling within the UK merger control rules (that is, whether it gives rise to a relevant merger situation under the Enterprise Act). If this analysis has been carried out before the SPA is exchanged, and the buyer has concluded that a relevant merger situation does not arise, it should be possible to dispense with a UK competition condition altogether.
Paragraph 3.2(b) to Paragraph 3.2(d) relate to each of the alternative outcomes of a UK merger control investigation. In particular:
  • The CMA at Phase 1 could unconditionally clear a transaction.
  • A transaction could be cleared at Phase 1 subject to conditions (undertakings in lieu of reference).
  • The CMA could refer the transaction for a Phase 2 investigation (conducted by an inquiry group comprising panel members of the CMA). On making such a reference, the CMA refers the transaction to the CMA chair who then constitutes an inquiry group to conduct such investigation.
  • Following a Phase 2 investigation, the CMA could:
    • clear the transaction unconditionally;
    • clear the transaction subject to conditions at the end of its investigation; or
    • prohibit the transaction (and, if it has been completed, require it to be undone).
Not all the eventualities addressed in this paragraph will be appropriate in every transaction. In the simplest cases, when it is highly unlikely that the CMA would consider making a Phase 2 reference, it may only be necessary to include Paragraph 3.2(a) and/or Paragraph 3.2(b) below. Indeed, in such cases it may be debatable whether a UK merger control condition precedent is required at all. Similarly, if either party is unwilling to proceed with the transaction if a Phase 2 reference is made (or if a reference can only be avoided subject to undertakings), the conditions in Paragraph 3.2(c) and Paragraph 3.2(d) should be omitted.

General issues for the buyer

  • The buyer should conduct a thorough assessment of the merger control issues as early as possible in order to confirm the relevant merger control jurisdiction as well as the extent of any substantive competition issues. Where the buyer's initial assessment indicates that the transaction will be a merger qualifying for investigation under the UK merger control rules then, unless there are very pressing reasons to move quickly to completion which outweigh any potential competition risks, it is usually in the buyer's interests to seek to include a UK merger control condition precedent.
  • The buyer should ensure that the conditions reflect the possible merger control outcomes that will be acceptable for the transaction to proceed. For example:
  • The buyer will generally have primary responsibility for making any notification to the CMA but will require significant input from the seller. It will also want to ensure that it maintains control of contact with the CMA and of the clearance process. It may, therefore, be appropriate to include an express contractual provision requiring the seller to co-operate, to provide all reasonable assistance and to ensure that it informs the buyer of any contact with the authorities (possibly in advance) and provides copies of all information given to the CMA (subject to not exchanging commercially sensitive information).

General issues for the seller

The seller should:
  • As far as is reasonable (that is, where there are no obvious competition problems or any indications that the CMA will show an interest in the case), resist the inclusion of a UK merger control condition precedent. In any event, as in most cases the transaction may be completed prior to receiving clearance, the seller may want to ensure that the condition precedent is waivable (by one or both parties). This would mean that if the clearance has not been received prior to the intended completion date the seller could push for the condition precedent to be removed or waived. It should be noted, however, that this is only likely to be acceptable to the buyer if there is no indication that the CMA is considering making a reference at that time.
  • Consider whether it wishes to proceed with a transaction with a buyer who has competition problems and where there is a likelihood that there will be a second phase investigation. The seller will be required to participate in any such investigation by the competition authorities and not only will it involve management time and expense, but it will delay completion and may prevent the seller from pursuing other sale opportunities which could be completed more quickly.
  • Seek to ensure that the buyer does not have complete discretion to walk away from the deal where the CMA requires unreasonable undertakings. It may be useful to determine in advance the thresholds for undertakings which the buyer will find acceptable and, at least, to require that the buyer act reasonably in making such a determination.
Although the seller may be happy for the buyer to take the lead in the notification process it will, at very least, want to ensure that it is kept fully informed, is given the opportunity to comment and has sufficient information to monitor that the notification process is being handled effectively. It may therefore require an express contractual provision imposing these obligations on the buyer.
[Either:]
(a)[the Buyer is satisfied (whether or not as a result of receiving confirmation from the CMA) that the Transaction does not constitute a relevant merger situation within the meaning of Part 3 of the Enterprise Act 2002][; or]
Note: Application of UK merger control regime
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Application of UK merger control regime

It may be appropriate to include this condition if the buyer has not ruled out the application of the UK merger control regime and it is only prepared to proceed to completion if it is satisfied that the transaction involves no competition implications under the UK regime.
For further information on when a transaction will be within the scope of the merger regime under the Enterprise Act, see Practice note, Competition: share purchases: When does the UK merger regime apply?.
See also Drafting note, Why have a UK merger control condition?.
(b)[the Buyer receives confirmation in terms satisfactory to it that there will not be a Phase 2 CMA reference of the Transaction][; or]
Note: Clearance at Phase 1
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Clearance at Phase 1

The wording in this paragraph is, arguably, broad enough to allow the condition to be satisfied in the case of conditional clearance at Phase 1 (acceptance of undertakings in lieu of reference).
The condition provides that the clearance must be issued on terms satisfactory to the buyer. Therefore, if an undertaking is satisfactory to the buyer then the condition will be satisfied. However, the buyer may be able to argue that the imposition of conditions is, in itself, unsatisfactory and that a conditional clearance does not fulfil the relevant condition. To avoid any doubt as to whether a conditional clearance would be satisfactory, it may be sensible to include an express condition covering this outcome (see Paragraph 3.2(c)) and/or to add the word “unconditional” between the words "receiving" and "confirmation" in the paragraph above.
(c)[the Buyer receives confirmation in terms satisfactory to it that there will not be a Phase 2 CMA reference of the Transaction subject to the acceptance of undertakings by the CMA under Part 3 of the Enterprise Act 2002, and the terms of those undertakings are in all respects satisfactory to the Buyer][; or]
Note: Undertakings in lieu of reference
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Undertakings in lieu of reference

The CMA may clear the transaction at the first phase subject to certain conditions. For further information, see Practice note, Competition: share purchases: Undertakings in lieu.
The buyer may be prepared to accept reasonable undertakings if it will avoid a Phase 2 reference and this position is reflected in this Paragraph 3.2(c).

Negotiating and drafting issues

  • If the initial competition assessment indicates that it may be necessary to offer undertakings to the CMA to avoid a reference, the terms of this paragraph should be negotiated carefully to determine whether the buyer should have sole discretion as to whether the undertakings are satisfactory and acceptable (as currently drafted), or whether this should be judged by some objective, pre-agreed standard (for example, some form of quantification of the divestment package).
  • The buyer should ensure the drafting in this paragraph protects it from being forced to proceed with a transaction when it is obliged to give undertakings to the CMA that are unacceptable to it. Undertakings could be unacceptable due to their impact on the buyer’s existing business, or because the undertakings undermine the financial rationale for entering into the deal in the first place. The use of indemnities from the seller or other mechanisms to adjust the purchase price could be considered to protect the buyer’s position.
  • The seller should try to ensure that the buyer does not have complete discretion to walk away from the deal where the CMA requires undertakings the buyer considers to be unreasonable. It may be useful to determine in advance the thresholds for undertakings that the buyer will find acceptable and, at the very least, to require that the buyer act reasonably in making its determination.
  • In cases where it is anticipated that undertakings will be required, it may be appropriate to include additional provisions to determine who should bear the risk of any losses to the value of the business being acquired as a result of any required divestments or other undertakings (i.e. whether there should be an adjustment to the purchase price).
(d)[an inquiry following a Phase 2 CMA reference of the Transaction is completed pursuant to which the CMA makes a finding that [either:]
Note: Phase 2 references
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Phase 2 references

In anything other than the most clear-cut cases, where there are no competition issues, the question of whether the condition precedent should extend to cover the possibility of a Phase 2 CMA investigation will be an issue for negotiation between the parties. The condition in this paragraph caters for this eventuality by providing for the transaction to proceed if it is cleared at the end of the Phase 2 investigation (either with or without the acceptance of undertakings).

Negotiation and drafting issues

  • The buyer will need to carefully consider whether it is prepared to undergo the time, expense and management commitment of a lengthy second phase merger control investigation or whether it wishes to retain the option to walk away from the deal if first phase clearance is not obtained.
  • From the seller's perspective, it should consider whether it wishes to proceed to enter into an agreement with the buyer if it is likely that there will be a second phase investigation. The seller will be required to participate in the CMA's investigation which, as well as involving management time and expense, will also delay completion and may prevent the seller from pursuing other sale opportunities that could be completed more quickly.
  • If it is agreed that the transaction will fail if there is a reference for a Phase 2 investigation, this condition will not be appropriate.
  • Where a Phase 2 reference is made, the CMA inquiry group may clear the transaction at the end of its investigation subject to the buyer accepting certain undertakings. This eventuality is reflected in. Paragraph 3.2(d)(ii). For points to consider in relation to such undertakings, see Drafting note, Undertakings in lieu of reference.
(i)
the Transaction is not expected to result in a substantial lessening of competition within any market or markets in the UK for goods or services[; or
(ii)
the Transaction may be expected to result in a substantial lessening of competition within a market or markets in the UK for goods or services but that the acceptance of specified undertakings by the Buyer would have the effect of remedying, mitigating or preventing that lessening of competition and the terms of such undertakings are in all respects acceptable to the Buyer];]
[and, in addition to [Paragraph 3.2(a)][, Paragraph 3.2(b)][, Paragraph 3.2(c)] [and Paragraph 3.2(d)] above,[ either] the period specified in Rule 25 of the Competition Appeal Tribunal Rules 2015 for making an application under section 120 of the Enterprise Act 2002 for the review of the CMA's decision in relation to the Transaction has expired without any such application being made[ or, where such an application has been made, the Competition Appeal Tribunal has dismissed it].
Note: Appeals to the Competition Appeal Tribunal
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Appeals to the Competition Appeal Tribunal

CMA decisions can be appealed to the Competition Appeal Tribunal (CAT), either by the parties to the merger or any other "person aggrieved" by the decision (see Practice note, Transactions and practices: UK Mergers and acquisitions: Review of merger decisions). Therefore, even if a transaction is approved there remains a risk of that decision being challenged.
Although an appeal does not have the effect of suspending the contested decision, it will give rise to a period of uncertainty. If the CAT ultimately annuls the decision, then the case would be likely to be remitted back to the decision-maker for re-consideration. Therefore, the final part of this paragraph allows completion to be delayed until there is no prospect of any (or a successful) appeal to the CAT.
[In this Paragraph 3.2, a Phase 2 CMA reference means a reference by the CMA to its chair for the constitution of a group under Schedule 4 to the Enterprise and Regulatory Reform Act 2013.]
Note: Definition of Phase 2 CMA reference
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Definition of Phase 2 CMA reference

Include this definition if any of the conditions in Paragraph 3.2(b) to Paragraph 3.2(d) (inclusive) are relevant to the transaction.
3.3Other consents and clearance
Note: Other consents and clearances (optional clause)
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Other consents and clearances (optional clause)

This paragraph includes a catch-all condition to cover any competition issues in jurisdictions other than the EU or UK. So far as possible, it is, however, sensible to identify the jurisdictions which have applicable merger control rules and to determine the terms on which the condition will be satisfied.
[
(a)The Buyer receiving confirmation in terms satisfactory to it that the Transaction has been approved and no objections have been raised by:
(i)
[LIST ANY OTHER RELEVANT NATIONAL COMPETITION AUTHORITIES AND NATIONAL MERGER CONTROL RULES IN ANY OTHER COUNTRIES WHERE THE TRANSACTION IS TO BE NOTIFIED FOR CLEARANCE.]
(b)[The grant, in terms satisfactory to the Buyer, of all those consents, authorisations or similar clearances which are:
(i)
required by any government, regulatory body or authority for Completion; or
(ii)
in the reasonable opinion of the Buyer, necessary or desirable for Completion.]
]
4.[Other conditions
No person having:
(a)commenced, or threatened to commence, any proceedings or investigation for the purpose of prohibiting or otherwise challenging or interfering with the Transaction;
(b)taken or threatened to take any action as a result of, or in anticipation of, the Transaction that would be materially inconsistent with any of the Warranties; or
(c)enacted or proposed any legislation (including any subordinate legislation) which would prohibit, materially restrict or materially delay the implementation of the Transaction or the operations of the Company or any of the Subsidiaries.]
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