Acquisition Agreements in PE Deals: Legal Considerations and Best Practices

In a private equity (PE) buyout, the main contract is usually a share purchase agreement (SPA). It sets out what is being sold, the price and how it is worked out, the promises each side makes, and what happens if something goes wrong. PE sellers want a "clean exit" with little continuing liability, so buyers often rely on insurance rather than claims against the sellers.

Structure of an SPA

A typical SPA covers:

• the sale and purchase of the shares, and the parties (often a newly formed buyer company or "bidco");
• the price and price mechanism;
• conditions that must be met before completion, if signing and completion are separate;
• conduct of the business between signing and completion;
• completion deliverables (resignations, share transfers, repayment of debt);
• warranties, indemnities and the limits on claims;
• restrictive covenants; and
• governing law and other general terms.

Price: locked box or completion accounts

There are two main ways of fixing the price.

	Locked box	Completion accounts
How it works	Price is fixed by reference to a balance sheet at an earlier date (the "locked box date"). Economic risk passes to the buyer from that date.	An estimated price is paid at completion and adjusted afterwards by reference to accounts drawn up as at completion.
Main protection	Seller promises there has been no "leakage" of value since the locked box date.	Adjustments for actual cash, debt and working capital.

Leakage

In a locked box deal, the sellers promise that no value has left the company for their benefit since the locked box date, for example dividends, management or monitoring fees paid to the PE house, bonuses or waived debts. Agreed exceptions are listed as "permitted leakage". The buyer's remedy is usually a pound-for-pound payment from the person who received the leakage, often subject to a short claim period.

Warranties and indemnities

Warranties are statements of fact about the company, such as its accounts, contracts, employees, tax, property, IT and compliance. If a warranty is untrue, the buyer can claim damages, but must normally show that the breach reduced the value of the shares. Indemnities are promises to pay pound for pound for a specific liability, such as a known tax issue or litigation, without proving loss of value. A tax covenant is a form of indemnity covering pre-completion tax.

Who gives the warranties

PE sellers typically give only fundamental warranties about title to their shares and their capacity to sign. They argue they do not run the business day to day and need to return money to fund investors. Business warranties are often given by the management team, especially where managers are selling or reinvesting. Management liability is usually capped at a modest level, and the buyer relies mainly on insurance.

The disclosure letter

Sellers qualify the warranties by disclosing exceptions in a disclosure letter. General disclosures (such as everything in the data room or public registers) and specific disclosures against particular warranties are negotiated. The buyer normally cannot claim for a matter that was fairly disclosed.

Warranty and indemnity (W&I) insurance

W&I insurance is very common on PE deals. A buy-side policy lets the buyer claim against the insurer for breach of warranty, so the sellers' liability can be capped at a low level, sometimes a nominal £1. Points to be aware of:

• insurers exclude matters known to the buyer and issues found in due diligence;
• common exclusions include known tax issues, pension underfunding, forward-looking statements and some environmental risks; and
• the insurer usually waives its right to pursue the sellers except for fraud.

Limitations on claims

SPAs limit the sellers' exposure, typically with:

• a de minimis amount below which individual claims are ignored, and a basket or threshold that total claims must exceed;
• an overall cap, often lower for business warranties than for title warranties;
• time limits for notifying claims, commonly shorter for business warranties than for tax and title, and shorter than the statutory periods under the Limitation Act 1980 (six years for a simple contract, twelve for a deed);
• exclusions for matters disclosed or caused by the buyer after completion; and
• a carve-out removing limits for fraud.

Conditions to completion

National security (NSI Act 2021)

Under the National Security and Investment Act 2021, acquisitions of entities active in any of 17 sensitive areas (including defence, energy, transport, communications, artificial intelligence, data infrastructure and quantum technologies) must be notified to the government and approved before completion where the buyer's shareholding or voting rights cross more than 25%, more than 50% or 75% or more, or give it the power to pass or block resolutions. A notifiable acquisition completed without approval is void, and penalties can reach 5% of worldwide turnover or £10 million, whichever is higher. The review period is up to 30 working days after acceptance (the government can also call in other deals). The government announced in March 2026 that it plans to change the sectors (adding water and creating separate semiconductor and critical minerals categories), so check the current guidance before signing.

Merger control (CMA)

UK merger control is voluntary: there is no duty to notify the Competition and Markets Authority (CMA), but it can investigate deals within its jurisdiction, before or after completion. Since 1 January 2025, following the Digital Markets, Competition and Consumers Act 2024, the CMA has jurisdiction where:

• the target's UK turnover exceeds £100 million;
• the merging parties together supply or acquire 25% or more of particular goods or services in the UK, and at least one has UK turnover over £10 million; or
• one party has at least a one-third share of supply and UK turnover over £350 million, and the other has a UK connection (the "hybrid" test).

There is a safe harbour where no party has UK turnover above £10 million. See section 23 of the Enterprise Act 2002 and the CMA's jurisdiction and procedure guidance. Where there is a risk of review, the SPA may make CMA clearance a condition.

Restrictive covenants

Sellers, especially management sellers, usually promise not to compete with the business, solicit its customers or staff, or use its confidential information for a set period. Courts are generally more willing to enforce such covenants in a business sale than in an employment contract, but they must still protect legitimate interests and be reasonable in scope and duration. PE sellers often refuse non-competes because of their other investments, or accept only narrow ones.

After completion

• Complete any price adjustment or leakage claims within the agreed timetable.
• Update Companies House filings, including new directors and PSCs, whose identities must now be verified.
• Diarise claim deadlines under the SPA and the W&I policy.

Key points

• PE sellers prefer a locked box price and give only title and capacity warranties.
• Management may give business warranties, usually with low caps backed by W&I insurance.
• Warranties need proof of loss; indemnities pay pound for pound.
• Specific disclosure and careful limits on claims are central to the risk allocation.
• NSI Act notification is mandatory in 17 sectors; CMA review is voluntary but thresholds changed on 1 January 2025.
• Restrictive covenants must be reasonable to be enforceable.