Organisational form

In the UK, the typical legal structure for a venture capital-backed start-up is a private company limited by shares. This form is preferred due to the limited liability of shareholders, flexibility, ease of incorporation, and compatibility with equity financing.

Capitalisation structure

UK venture capital transactions typically involve the issuance of preferred shares to investors. These shares may carry rights such as liquidation preferences, anti-dilution protections, board representation/observer rights, information rights, exit rights and investor consent rights.

Sometimes investors will prefer to subscribe for a class of ordinary share. Typically, this is seen in early investment rounds (i.e. angels/family and friends only) and/or where investors need to comply with tax efficient investment regimes, such as the Venture Capital Trust scheme (VCT), the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

The capitalisation structure often evolves through multiple funding rounds, with each round introducing a new class of preferred shares. Convertible loan notes, warrants, advance subscription agreements (ASAs) and SAFEs (Simple Agreements for Future Equity) are also, to different extents, prevalent. Whilst convertible loan notes and advance assurance agreements are used, especially in early-stage financings, SAFEs (Simple Agreements for Future Equity) are less common in the UK market compared to the US. Their use is increasing but ASAs are more frequently used, partly due to their ability to comply with the UK’s VCT, SEIS and EIS regimes. That said, ASAs and SAFEs are commercially similar in that they both provide a quick way of getting funding into companies, with the securities converting into shares at a later date (typically on the next funding round, or on a longstop date) and are particularly useful where a valuation cannot be agreed (e.g. in bridging round or early fundraising scenarios).

Whilst UK practice is increasingly influenced by US norms as reflected in NVCA documentation, several distinctions remain. Key differences include:

• Document structure: British Private Equity & Venture Capital Association (BVCA) based deals generally consolidate terms into fewer core documents (i.e. subscription agreement, shareholders’ agreement, and articles of association), whereas US deals typically involve modular agreements (e.g. certificate of incorporation, stock purchase agreement, investors’ rights agreement, voting agreement, and right of first refusal, and co-sale agreement).
• Investor protections: UK preference shares will often afford investors broad veto rights, covering operational and board-level decisions, whereas US preference shares generally have narrower veto rights focused on fundamental matters, with a director veto optional but less commonly used.
• Anti-dilution rights:
  – Under BVCA-style documents, anti-dilution is usually effected by issuing bonus shares to a preference shareholder. If a down round occurs, the investor receives additional shares for free so that their overall economic position reflects the weighted average formula. This approach avoids altering the conversion ratio and keeps the mechanics simple – investors end up with more shares, but the original conversion terms remain intact.
  – In US practice, the adjustment is typically made by changing the conversion price of the preferred shares. The conversion ratio (preferred to common) is recalculated based on the new price, so when the investor converts, they receive more common shares than before. This method is formula-driven and embedded in the conversion mechanics rather than issuing new shares outright.
• Warranties and disclosure: US investors will expect detailed representations and warranties. Disclosures are generally limited to specific matters. Representations and warranties are given by the company and not by the founders. In the UK, warranties are typically given but representations are not. Warranties may also be given by the founders, albeit the BVCA documents have evolved so as not to include founder warranties as an expectation, and founder warranties are now most commonly seen in earlier rounds (i.e. pre-seed and seed rounds). Certain general, as well as specific, disclosures are accepted.

Whilst UK venture capital practice aligns conceptually with US norms, it is shaped by local tax regimes, statutory rights, and BVCA precedents. The result is a market that offers similar investor protections but through mechanisms tailored to UK law and policy, ensuring both founder and investor interests are balanced within a distinct legal framework.

In the UK, the acquisition of venture capital-backed start-ups typically occurs via share purchase. Some acquisitions may be via asset purchase, but this is uncommon and tends to be found in distressed scenarios or where the buyer wishes to cherry-pick assets and liabilities.

Share purchase – corporate law considerations

The transaction is governed by a share purchase agreement (SPA). The SPA will contain all main transaction terms, including a tax covenant and warranties given by the sellers or the major and/or management sellers. A disclosure letter will provide qualifications to certain non-fundamental warranties.

Investors will not generally give warranties under the SPA (save for title and capacity warranties), which creates a coverage gap for buyers and will often mean that W&I insurance is required on the sale of a venture capital-backed company.

Drag-along, often embedded in the company’s articles of association and/or shareholders’ agreement, may sometimes be triggered to facilitate a clean exit where a company has a large cap table with many minority shareholders.

Share purchase – tax law considerations

Stamp duty at 0.5% applies to the transfer of shares. Sellers may benefit from Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) (BADR), reducing capital gains tax on qualifying disposals.

Asset purchase – corporate law considerations

Requires a detailed asset purchase agreement (APA). The APA will not contain a tax covenant but will include warranties. Each asset must be individually transferred, which can be administratively burdensome. Employment contracts may transfer under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006), potentially creating information obligations/requiring consultation with affected employees.

Asset purchase – tax law considerations

When a UK company disposes of assets under an APA, any gain arising in respect of those assets will be subject to corporation tax (main rate is currently 25%). If the net proceeds are later distributed to shareholders, the shareholders will be subject to tax on receipt. Shareholders will be subject to income tax if the proceeds were distributed by way of a dividend (current rate of 39.35% for additional rate taxpayers) otherwise they may be subject to capital gains tax on the proceeds should the UK company be liquidated (currently at 24% for additional rate taxpayers). As a result, using an APA can create a risk of double taxation.

Letters of intent (LOIs), also often referred to as heads of terms or term sheets, are a common feature of UK VC, PE and M&A transactions. They provide a framework for negotiations and outline key commercial terms before the definitive agreements are drafted.

LOIs and term sheets are typically not intended to be legally binding in respect of the proposed transaction (and this will include matters such as the offer, and the price). However, certain provisions, such as confidentiality, exclusivity, governing law, and occasionally cost allocation, are routinely drafted as binding.

Care must be taken to ensure that non-binding terms do not inadvertently create legally binding obligations. Entering into a preliminary agreement such as a LOI may crystallise that duty. As such, expert legal advice is needed to ensure that duty does not crystallise, particularly in cross-border transactions, as some jurisdictions impose an implied duty to negotiate in good faith which governs the parties’ behaviour from the very start. There is no such duty of good faith in the UK but even with a preliminary agreement governed by English law, parties must always take care in making sure that the non-binding terms are expressly set out. One never knows how a court may interpret the law.

Conversely, care must also be taken to ensure that those binding terms intended to be binding are actually legally binding. It is not always as easy to spot as one might think. In the UK, for certain of those terms to be binding, the terms need to be supported by consideration and/or executed as a deed.

Exclusivity is standard in UK practice and is usually included either within the LOI or in a separate agreement. It generally applies for a defined period (commonly eight to 12 weeks) and prevents the sellers/company from engaging with other potential buyers/investors during that time.

Deposits and break-up fees are not common in UK VC, PE and private M&A transactions. These mechanisms are generally considered off-market unless there is a specific rationale.

In the UK, the use of buyer equity as consideration in the acquisition of venture capital-backed start-ups is not uncommon, particularly in strategic acquisitions involving listed acquirers, trade buyers or growth-stage consolidators. This structure is often employed where:

• the buyer is a listed company;
• the sellers wish to retain upside exposure to the buyer’s future growth;
• the transaction is part of a roll-up strategy or merger of equals, or the buyer is PE-backed, where equity alignment is commercially desirable; or
• in distressed/accelerated M&A scenarios where the use of equity is seen as lower risk than cash consideration.

Buyer equity may be issued in the form of ordinary or preferred shares in the buyer or contingent value rights or earn-out linked equity instruments.

Institutional investors may not want to roll into a company on which they have not undertaken due diligence, or which has a different growth agenda to a typical VC-backed business, and/or may wish to cash out instead. As such, transactions with a mixture of consideration tailored for different types of shareholders are seen frequently.

Legal and regulatory considerations

The issuance of buyer equity must comply with the Companies Act 2006, which governs share allotment, pre-emption rights, and shareholder approvals. Where the buyer is a UK company, its articles of association must authorise the issuance of shares and may require shareholder resolutions to approve the transaction.

If the buyer is a UK public company, the transaction may trigger obligations under the Financial Services and Markets Act 2000, including:

• prospectus requirements if shares are offered to the public;
• disclosure and transparency rules under the UK Listing Rules or AIM Rules; and
• Takeover Code implications if the consideration shares trigger certain thresholds.

Where buyer equity is offered to non-institutional investors, care must also be taken to avoid triggering financial promotion restrictions, unless exemptions apply (e.g., investment professionals, high net worth individuals).

The issuance of buyer equity to VC investors or founders may need to navigate additional securities law constraints where:

• the buyer is a non-UK entity, and the shares are subject to foreign securities regimes (e.g. the US Securities Act 1933); or
• the target’s shareholders include US persons, requiring compliance with Regulation D or reliance on accredited investor exemptions. https://outlook.office365.com/owa/?ItemID=AAMkAGIyNzMwY2YyLTZhMjQtNDViNy1hYTNjLWVmYmJhNzJhYTA3ZgBGAAAAAAB31SWT8JHgR6Y2/1to6271BwC89P8KX84ZR6Aqe4YOMjSPAAAAAAEJAAC89P8KX84ZR6Aqe4YOMjSPAABCzIFdAAA=&exvsurl=1&viewmodel=ReadMessageItem

Tax considerations

From a UK tax perspective, the sale of shares for the receipt of buyer equity may trigger certain tax liabilities for the selling shareholders. Key tax considerations include:

• the availability of rollover relief on a share for share exchange under section 135 of the Taxation of Chargeable Gains Act 1992, which may defer capital gains tax if the transaction meets the qualifying conditions;
• the valuation of consideration shares, which must be robust and defensible;
• where the target has raised funds and the selling shareholder has invested funds under EIS/SEIS or VCT, care must be taken to avoid breaching conditions that would disqualify relief; and
• where buyer equity is issued as part of an earn-out, the tax treatment may vary depending on whether the earn-out is structured as a right to future shares or cash.

Earn-outs are a well-established feature of UK private M&A transactions, particularly where there is a need to bridge a valuation gap (especially where the sellers believe the business has significant growth potential that is not yet reflected in historical financials). They are most common in deals involving early-stage, high-growth or sector-specific businesses (e.g. technology or life sciences), where future performance is difficult to predict but valuations assume a high growth rate.

Earn-outs operate as a deferred consideration mechanism, with additional payments contingent on the target achieving agreed performance metrics post-completion. Typical features include:

• Performance Metrics: Most commonly financial (EBITDA, revenue or net profits), though operational targets may also be used.
• Measurement Period: Usually 12–36 months post-completion.
• Payment Mechanics: One or more instalments, often capped at a maximum amount stated in the SPA.
• Security and Control: Sellers may seek covenants restricting buyer actions that could adversely affect earn-out achievement; buyers often try to resist overly restrictive operational covenants.

Earn-outs are among the most litigated provisions in UK SPAs. Disputes typically arise from:

• ambiguity in drafting (e.g., undefined terms or general restrictions on the running of the business during the earn-out period etc);
• accounting versus legal interpretation of performance calculations; and
• timing and mechanics of earn-out payments.

In the UK, the determination of the final purchase price in the acquisition of venture capital-backed start-ups (and private companies generally) typically involves either a completion accounts or a locked box accounts mechanism.

Whilst both approaches are used, the locked box mechanism has become increasingly prevalent, particularly in transactions involving private equity sellers or competitive auction processes. In transactions involving the sale and purchase of venture capital-backed companies, locked box mechanisms are increasingly used where the target has stable financials, and the buyer is comfortable relying on historic accounts. Venture investors will also generally prefer a locked box account mechanism to minimise the risk of disputes as to consideration arising post-completion, so that they can distribute proceeds up to their limited partners without fear of subsequent adjustment or claw back. However, buyers may still prefer completion accounts where there is uncertainty, volatility, or limited visibility into the target’s financials. If such a mechanism is used, an escrow account or holdback mechanism may be used to facilitate any adjustments.

Under the completion accounts approach, the purchase price is initially estimated and then adjusted post-completion based on the actual financial position of the target at the closing date. This typically involves:

• preparation of closing accounts post-completion;
• adjustment for cash, net debt and working capital variances; and
• a pound-for-pound true-up to reflect the actual financials versus the agreed target metrics.

This mechanism means that the amount paid on completion is just a payment on account, with the actual consideration being determined by reference to the completion accounts some days, even months, after completion. Clearly, whilst it tends to be more accurate, it can lead to protracted negotiations, delayed distributions, and post-closing disputes.

The locked box structure fixes the purchase price at signing, based on a historic set of financial statements (the “locked box accounts”) dated prior to completion. Key features include:

• no post-completion adjustments: the price is agreed upfront;
• leakage covenants: the sellers covenant that no value has been extracted by them or for their benefit from the target between the locked box date and completion (e.g. no dividends have been made etc.);
• permitted leakage: specific exceptions agreed in the SPA (e.g. investor management fees etc.); and
• an interest accrual (or “ticker”) or other value accrual may also be negotiated as compensation to the sellers for maintaining the business during the locked box period and to ensure value is not left on the table as a result of used locked box accounts.

This structure is often favoured by sellers for its price certainty, clean exit, and speed of execution.

In the UK, employee equity in venture capital-backed start-ups is most frequently granted through Enterprise Management Incentive (EMI) qualifying options; EMI is a tax-advantaged scheme designed to incentivise employees in high-growth companies. EMI options are favoured due to their flexibility, favourable tax treatment, and alignment with HMRC-approved valuations.

Other common structures include a Company Share Option Plan (CSOP), another type of tax-advantaged scheme but not as flexible as EMI options, used when a company does not qualify for EMI (e.g. a company exceeds EMI thresholds) , non-tax advantaged options, used when EMI or CSOP eligibility criteria are not met (e.g. for non-UK employees where the company is controlled by another corporate entity), and growth shares, a class of share generally accruing value on an exit provided certain valuation hurdles have been met, which are used in private companies to align employee interests with company value appreciation.

EMI options typically include an exercise price (often set at market value as at the grant date to avoid income tax on exercise), a vesting schedule (commonly over four years with a one-year cliff), and leaver provisions, distinguishing between “good” and “bad” leavers (which affect the treatment of unvested and vested options), and will either be available to exercise once vested or only upon an exit (exercise only on an exit is more common in the UK to avoid a company having lots of minority shareholders).

In the context of a sale, employee equity is typically addressed via option acceleration (which may be full or partial) and/or a requirement for option exercise immediately pre-completion, with the option holders then participating in the sale as a shareholder.

In some instances, equity may be rolled over into the buyer’s equity and there can also be ‘sweet equity’ options in the acquiring entity, particularly in strategic acquisitions and in respect of key employees.

Retaining key talent post-acquisition is a critical concern in UK acquisitions. The uncertainty surrounding a sale often leads to attrition, particularly among high-performing employees and those integral to the acquired company’s operations. To mitigate this risk, acquirers deploy a range of financial and equity-based incentives designed to align employee interests with the post-deal success of the combined entity, including deferred and/or contingent consideration structures (e.g. an earn-out), fixed or deferred cash retention or transition bonuses or improved employment terms, which may be time or performance based, and the grant of new equity incentives in either the target or the acquiring entity (or another entity in the buyer’s group). As above, in some instances, existing employee equity (e.g. options) may be rolled over into the buyer’s equity.

In the UK, works councils, as understood in continental European jurisdictions, are not a common feature of the employment landscape, save perhaps for a minority of larger employers who operate national or European works council arrangements. Employee representation in the UK is more commonly channelled through trade unions, employee forums, or consultation bodies established on a voluntary basis.

Among VC-backed start-ups and technology companies, the presence of formal union representation or works council-style structures is rare. These companies tend to operate leanly, prioritising agility and speed over formalised employee representation. Start-ups often lack the scale or maturity to support structured collective bargaining or consultation frameworks, and many founders view such mechanisms as incompatible with the fast-paced, innovation-driven culture of early-stage and fast growth ventures. Where unions are recognised, employers must engage in collective bargaining over pay, hours, and other employment terms.

However, as companies scale, particularly those approaching IPO or acquisition, there is a growing trend toward implementing employee engagement mechanisms, including:

• employee consultation forums;
• pulse surveys and feedback platforms; and
• voluntary employee committees focused on diversity, wellbeing, or sustainability

These are typically informal and do not carry the legal weight of a statutory works council. All UK employers should be aware of forthcoming changes under the Employment Rights Bill in the UK, expected to come into force in October 2026, which are likely to increase union rights (and consequently union representation) in workplaces which are currently non-unionised.

In the UK, holdbacks, deferred payments to founders or key personnel contingent on post-sale service or performance, are a common feature in the sale of VC-backed start-ups. These arrangements are typically designed to align incentives and ensure continuity during transitional periods. However, they raise complex tax considerations, particularly regarding the characterisation of proceeds as either capital gains or employment income.

Under UK tax law, where a holdback is contingent on continued employment or service, HMRC may treat the payment as employment-related securities income, taxable at income tax rates (up to 45%) and subject to employer and employee National Insurance Contributions (NICs). This applies even if the payment is structured as consideration for shares, unless specific exemptions or structuring techniques are used. HMRC have published guidance with respect to key considerations for determining whether a holdback may be employment income, so it is useful to refer to that guidance when drafting holdback mechanics.

HMRC’s position is rooted in the principle that if a payment is conditional on employment, it is deemed to arise “by reason of employment” under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

Despite this default position, there are structuring mechanisms that may allow founders and key personnel to achieve capital gains treatment (which may benefit from BADR, enabling founders to pay a lower rate of capital gains tax than they would otherwise). A key feature for capital gains treatment is that the same consideration structure should apply to all holders of a particular class of share (i.e. the same should apply for employee shareholders and non-employee shareholders).

Where the holdback is not conditional on continued service, and is instead tied to warranties, indemnities, or other commercial conditions, it may be treated as part of the share sale consideration, qualifying for capital gains tax treatment.

In some cases, a share buyback mechanism is used, with the company repurchasing shares from the founder post-sale. Provided the buyback meets the strict statutory conditions, it may be treated as a capital transaction. However, HMRC clearance is often sought to confirm treatment, and for the clearance to be valid, this must be sought prior to the buyback.

In summary, holdbacks for founders and key personnel are a relatively common feature in UK venture capital-backed exits, but their tax treatment hinges on careful structuring. Whilst HMRC generally treats service-contingent payments as income, mechanisms exist to achieve capital gains treatment, particularly through unconditional structuring, BADR qualification, and advance clearance. Legal and tax advisers must work closely to ensure documentation supports the intended treatment and mitigates risk.

Non-compete and non-solicit covenants for founders and key employees are common in UK VC-backed exits. Buyers and investors typically require these restrictions to protect the value of the acquired business, particularly where goodwill and client relationships are heavily tied to the founders or senior team.

Non-compete covenants in an SPA prohibit involvement in a competing business for a defined period post-completion. Non-solicit covenants prevent solicitation of customers, suppliers, and employees for a similar period. These covenants are included in the SPA as they attach to the goodwill and know-how etc. being acquired. These covenants are different in scope and term to those found in new employment or consultancy agreements or shareholders’ agreements (if equity is being rolled up into the buyer) for retained management.

Under UK common law, restrictive covenants must be reasonable in scope, duration, and geography to be enforceable. They must protect a legitimate business interest (e.g. goodwill, confidential information) and go no further than necessary. Overly broad restrictions risk being struck down as an unlawful restraint of trade. We tend to see a range of anything from six months to three years’ duration for such covenants in the SPA, usually linked to the role of the relevant seller. As a general rule, restrictions in an SPA under English law should not last more than three years where both goodwill and secret technical know-how are acquired and two years where only goodwill is acquired. Recent UK government proposals to cap non-competes at three months in employment contracts do not currently apply to covenants in sale agreements, which remain governed by common law reasonableness tests.

Closing conditions in UK VC-backed exits generally mirror those in broader private M&A practice, but with some nuances reflecting the nature of early-stage businesses. Typical conditions include:

• Regulatory approvals: if applicable, clearance from relevant competition authorities, sector regulators and/or under the National Security and Investment Act 2021.
• Third-party consents: consents under key contracts, IP licences, or financing arrangements.
• No breach of warranties: confirmation that sellers’ warranties remain true and accurate at completion.
• Performance of covenants: compliance with pre-completion obligations (e.g. conduct of business restrictions).
• Delivery of closing deliverables: updated statutory books, board resolutions, assignments of IP, and release of security interests etc.
• Employee matters: execution of new employment or consultancy agreements for retained founders/key staff.
• Completion of reorganisation: Where pre-closing steps (e.g. group simplification or overseas carve-outs) are required.

MAE clauses are less common in UK private M&A transactions, including VC-backed deals, than in US practice. UK buyers typically rely on warranty protection and interim covenants rather than broad MAE conditions.

Where included, MAE provisions are usually narrowly drafted and tied to specific events (e.g. insolvency or loss of key IP rights) rather than general business deterioration.

In competitive processes or founder-friendly deals, MAE conditions are often resisted entirely to preserve deal certainty.

a. Deemed disclosure of the data room is not uncommon in a UK deal. That being said, it often depends on the quality of the data room provided. A poorly organised data room or one where a large number of documents have been included without being requested could lead to a purchaser seeking to reject this concept.

b. Knowledge qualifiers are fairly common, but representations and warranties covering certain areas tend to be excluded, for example, around ownership of shares as these are considered fundamental to the transaction and caveats will not be accepted. Certain compliance warranties may also be absolute so the risk of historical breaches are on the sellers. For reasons stated earlier, representations are not as common in UK transactions and UK private M&A transactions, including VC-backed deals.

a. The general position under UK law is that warranty coverage is provided on UK private M&A transactions, including VC-backed deals, as general protection for purchasers from there being issues post-closing whereas seller indemnification is usually limited to pre-closing taxes payable and any identified issues. Seller indemnification may cover a wide range of issues including not limited to issues with share ownership, regulatory compliance or employment law compliance. Purchase documentation also includes a tax covenant which contains tax specific indemnities.

b. Typically indemnification is for: (i) a fixed amount if the quantum of the issue is known; or (ii) if the quantum is unknown or cannot be precisely calculated then the losses associated with the specific issue that indemnification is protecting against, which at its greatest extent will be in most cases capped at the consideration paid by the purchaser for the acquisition.

c. There is no set time period for survival of seller indemnification provisions as it will depend on the issue that the protection is being sought against. Typically, indemnification will be for a period of between two to three years for general claims and 7 years for tax claims, though some indemnification provisions will have no time limit, for example, if there are issues with share ownership.

d. An indemnity for losses arising from a breach of warranty is not standard practice in the UK (as it is, conversely, in the US). However, there are certain instances under English law where a buyer will want to recover on a pound for pound basis any decrease in the target company/group’s assets or increase in its liabilities and/or costs in bringing the warranty claim. This avoids the argument that the breach of warranty does not impact on the value of the shares and therefore that no damages should be awarded, and also allows full recovery of costs incurred (not just those awarded by the court) – that said, this tends to be resisted by the sellers strongly in a UK deal unless there is good reason to allow the buyer a greater remedy than it would ordinarily be entitled to for breach of contract.

Under English law, indemnities are interpreted strictly and must be clearly drafted. Indemnities may allow recovery of broader losses than breach of contract claims, including consequential losses, but this will depend on how the indemnity, and the related limitations of liability provisions are drafted. An indemnity is intended to reimburse the purchaser if an identified risk crystallises and so recovery for loss of profits is possible if included in the provisions, but multiples are not typical as the indemnity is intended to be protective and not punitive.

Unlike a claim for breach of a warranty, mitigation is generally not applied when claiming under an indemnity.

W&I insurance is increasingly common in UK VC-backed tech deals, especially where sellers seek a clean exit and there is a gap in warranty coverage for the buyer. This gap occurs because the management of the target, who typically do not have majority shareholding, but have extensive knowledge of the target’s business and the investors, who have significant shareholding but are unwilling to provide this contractual level of comfort. Typically in the UK, it is a requirement of VC investors who will want a clean break and will not stand behind warranties and indemnities in the SPA.

As the name suggests, the warranties, title covenants and the tax indemnities, are all broadly covered.

However, W&I policies will only cover these to the extent they are unknown liabilities. Where an issue is identified or a liability is disclosed, these tend to be excluded from the cover unless bolt-on contingent risk insurance is taken out alongside the W&I policy. Although this additional insurance is becoming more common in the UK, it is not yet standard practice.

There are also certain “standard” exclusions in a UK-placed W&I policy, such as secondary tax liabilities, operations in high-risk jurisdictions, forward looking warranties/forecasts, pension underfunding, transfer pricing and known sector specific issues such as asbestos and pollution.

The UK merger control rules apply to acquisitions in which the investor acquires a stake that is sufficient to confer ‘control’ over the investee company, where certain jurisdictional thresholds are met. The UK applies a relatively low test for establishing whether there is an acquisition of ‘control’. In practical terms, acquiring a voting stake of 25% or more will usually confer control. However, in some circumstances (such as where there is accompanying material board representation), control may be deemed to exist at even lower stakes.

The jurisdictional tests are met where one or more of the following tests is met: (1) the target’s UK turnover exceeds £100 million; (2) the parties supply or acquire goods or services of the same description on the UK and, together, account for 25% or more of such goods or services in the UK (or a substantial part it); or (3) one party supplies or acquires at least 33% of goods or services of a particular description in the UK (or a substantial part of it) and has a UK turnover exceeding £350 million. Transactions are excluded from review if both parties have UK turnover of £10 million or less.

Importantly, the UK operates a ‘voluntary’ merger control notification regime. Where the above tests are met, it is not mandatory to notify a transaction for merger control clearance. However, whilst it is common for parties not to notify transactions that clearly do not give rise to competition concerns, parties may otherwise choose to inform the CMA about their transactions and obtain prior clearance, rather than risk the CMA exercising its powers to review transactions of its own initiative.

There are no specific rules relating to the technology sector although the CMA has reviewed several transactions in the sector. Note that, under new rules that came into force in 2025, companies that have been designated as having Strategic Market Status (SMS) must inform the CMA of certain transactions, such that the CMA can consider whether to review those transactions under the merger control regime. At the time of writing, the CMA has designated Google (in relation to general search and search advertising services, and mobile platform services) and Apple (for mobile platform services) as having SMS status; others may follow in due course.

The UK National Security and Investment Act 2021 (NSI Act) requires that certain investments are notified to the UK government for prior national security clearance. Transactions must be notified for pre-clearance where there is an acquisition of ‘control’ over a legal entity that has activities in the UK in one or more of 17 specified sectors which include Advanced Robotics; Artificial Intelligence; and Data Infrastructure. The meaning and scope of each sector is set out in accompanying definitions.

Under the NSI Act, there is an acquisition of control where an investor’s stake in the investee entity passes through one of the following thresholds: (1) more than 25%; (2) more than 50%; or (3) 75% or more.

Note that the UK government also retains a residual power to review certain transactions that fall below the above thresholds. Those transactions do not require notification for clearance, although there is scope to seek clearance on a voluntary basis rather than risk subsequent government review. Whilst the UK government has to date used its powers to block (or impose conditions on) transactions sparingly, a number of the transactions that it has objected to relate to foreign investment in technology markets (for example, semi-conductors).

In addition to antitrust and FDI discussed above, tech acquisitions may require regulatory approvals under sector-specific regimes such as financial services/fintech (from the Financial Conduct Authority), telecoms (from Ofcom), and data protection (from the Information Commissioners Office).

Here are common issues that arise during the acquisition of a technology company:

Verifying ownership – it can be difficult to establish that a company owns all aspects of its intellectual property from its website, trade marks and patents as not all records are public and/or easily accessible, and a company has often utilised third parties such as consultants or professional advisors to produce or protect intellectual property.

Ownership issues – even if a company believes it owns all its intellectual property there can be gaps in protection. An example is where intellectual property rights have not been properly assigned to the company, or the status is unclear. The default position in UK law is that intellectual property created by employees during their work is owned by their employer, however, it is best practice to ensure that this unambiguous from their employment contract. The position for contractors is different, and the ownership point needs to be addressed at the engagement stage. Otherwise, the contractor can own the intellectual property, and it can be costly in both time and money for the company as the contractor may want further remuneration to assign the intellectual property rights to the company.

Reliance on third party intellectual property – often companies rely on third-party intellectual property, however, this can be an issue where the intellectual property is: licensed on highly unfavourable terms, such as containing broad indemnities in favour of the licensor, or contains public source code so cannot ever be fully owned by the company and presents the possibility that an independent party could create the same product.

The UK’s data privacy regime originates from the European Union’s General Data Protection Regulation and is governed by the UK GDPR and the Data Protection Act 2018. The 2025 Data (Use and Access) Act introduces changes to automated decision-making and legitimate interest processing.

Here are common issues that arise during the acquisition of a technology company:

General – is the company sufficiently compliant with data privacy legislation and in particular, do its activities create a high level of risk for the purchaser, for example, the company deals with significant amounts of sensitive data such as patient health records.

Data transferability – does the company transfer personal data outside the UK and EEA and has it put in place adequate safeguards to ensure compliance.

Lawful basis for processing – a company may only process personal data if it has a lawful basis for doing so such as consent from the data subject. A company must ensure that it has sufficient basis to retain the amount of data that it holds on a data subject.

Here are three common issues:

Contractor misclassification is a significant risk. UK law distinguishes between employees, workers, and self-employed contractors with employees have the most employment rights. Misclassification can lead to claims for unpaid holiday pay and pensions contributions and can lead to individuals reaching greater protection from dismissal.

A second and linked issue is misclassification of overseas individuals who work for a company. This creates the same issues as with contractor misclassification but also adds another layer with domestic and overseas tax issues.

Deficiencies with employment contracts and contractor contracts. A key issue is that contracts are either missing key provisions that protect the target company or the provisions included are insufficiently tailored to specific employees.

In the UK, a range of dispute resolution mechanisms are included in M&A transaction documents. The most common approaches include:

• Litigation: most SPAs will be governed by English law and give jurisdiction to the English courts. Whilst litigation provides conclusive outcomes, it is often considered a last resort due to its cost, duration, and the public nature of hearings – factors that can be especially sensitive in technology transactions involving proprietary information.
• Arbitration: frequently chosen for cross-border transactions due to confidentiality, flexibility in procedure, and, depending on where the parties reside, removal of a perceived home venue advantage. Arbitration is particularly attractive where parties seek to avoid public litigation and maintain control over the selection of arbitrators with sector expertise.
• Expert Determination: often used for technical or financial disputes, such as purchase price adjustments or earn-out calculations. This mechanism provides a quicker and more cost-effective resolution for issues requiring specialist knowledge.
• Mediation: increasingly recommended as a first step before formal proceedings. Mediation offers a collaborative environment to resolve valuation disagreements, cultural integration concerns, and post-closing operational disputes without escalating costs.
• Escalation Clauses: multi-tiered clauses combining negotiation, mediation, and arbitration are common, ensuring parties attempt amicable resolution before resorting to binding processes.

Acquiring technology businesses presents unique challenges that often lead to disputes, including:

• Uncertainty over IP rights, licensing arrangements, and open-source software usage can trigger post-completion claims.
• Data and cyber breaches discovered post-closing or inadequate GDPR compliance can lead to indemnity claims and reputational risk.
• Valuation and earn-out disputes: technology targets often have complex revenue models and growth projections, making earn-out provisions contentious if performance metrics are unclear. Earn-out disputes are some of the most common M&A disputes, regardless of sector.

The transfer of shares in UK company attracts stamp duty of 0.5% of the consideration and application must be made to HMRC. Most applications can be made electronically. Stamp duty must be paid before the legal title to the shares can be registered by the target company. The target company can only update its statutory registers once the stamp duty application is completed. The acquisition of a company will also require filings to be made at Companies House, which can include the change of directors and the new person of significant control (equivalent of UBOs), which persons, if individuals, will need to verify their identities using photographic identification in order to be recorded at Companies House.

Shoosmiths is one of the most active UK law firms advising on M&A transactions, operating nationally and internationally. In 2024, Shoosmiths’ corporate division handled over 370 transactions with a combined value of $13.2bn.