2023 saw a drop off in UK merger and acquisition (M&A) activity in comparison with the previous year – which is perhaps unsurprising, given the political turmoil we witnessed in the final quarter of 2022 and the continued interest rate rises that followed throughout 2023. Business confidence was dented, and borrowing became the most expensive it had been in the past 15 years.  

But Scotland did not appear to feel the 2023 downturn to the same extent as the rest of the UK.  A key reason for this can be attributed to deals driven by Scottish SMEs, which form a significant part of the nation’s economy:

Scottish Government Statistics published in 2022 show that SMEs account for around 55% of private sector employment and 40% of private sector turnover.  On the whole, these businesses are resilient and in many cases

will be generating healthy profits and operating with strong balance sheets. This shelters them to some extent from the economic doom and gloom which impacts the headline hitting mega deals, while also making them attractive acquisition targets for national and international buyers and driving M&A activity within the SME sector.

Here at Morton Fraser MacRoberts, the corporate team advised on over 250 corporate transactions worth over £1billion in 2023. Some notable themes from 2023 included the attractiveness of Scottish businesses to national and international buyers and a continuation of the recent trend of consolidation in certain market sectors. The sectors where we saw the most deal volumes were healthcare (around 60 deals), environmental and energy (over 20 deals), engineering and traditional industries (around 20 deals) and wealth management and insurance (around 10 deals).

Looking forward to the rest of 2024, we have good reason to optimistic that an increase in deal activity will take place in Scotland, thanks to the expected easing of interest rates and hopefully an improvement in wider economic conditions that comes on the back of that. Scottish  businesses should continue to be attractive acquisition targets to market consolidators and others from within Scotland and elsewhere. There are also a number of private equity firms actively looking to deploy capital in Scotland (whether investments or buy-outs) which should also contribute to deal activity in 2024. Scottish businesses which have been acquired by private equity backed buyers in recent years may also be looking to make acquisitions as part of buy-and-build strategies.

Any business based in the rest of the UK (or elsewhere) that is looking at acquisition targets in Scotland will have some important legal considerations to make:

Legal Due Diligence – Scotland operates an entirely distinct legal system to that of England, Wales and Northern Ireland. If you are acquiring a Scottish based business or even just a business which has operations or assets in Scotland, you should ensure that your legal diligence appropriately addresses compliance with Scottish legislation so that any risks can be properly identified and addressed. Whilst many laws do apply UK wide, there is significant divergence in certain areas. Aside from more well known differences in areas such as property law, criminal law and family law, there are important differences in areas such as healthcare regulation, environmental regulation, tax law, employment law and insolvency.

Share / Asset Purchase Agreement – Given the difference in the legal and regulatory regimes referred to above, it is important to ensure that the warranties and indemnities contained in the purchase contract for the protection of the buyer are appropriately tailored to apply to Scottish legislation and regulations (as with the rest of the UK, if applicable). This is equally as relevant whether the contractual documentation is governed by Scottish or English law. If the purchase documentation is to be governed by Scottish law, there will be various other differences in the legal documentation compared to English law, which need to be accounted for.

Post-acquisition – Following a successful acquisition of a Scottish company or assets, it will of course continue to be subject to the applicable laws and regulations in Scotland. It can’t be assumed therefore that contracts (including employment contracts) and policies that may be in place for a business in England (for example) will be suitable for and compliant for the Scottish business.

With the above in mind, if you are considering acquiring a Scottish company or assets from outside of Scotland, it would be wise to obtain Scottish legal advice to ensure that your investment is properly protected in the purchase contract and that you are best informed of the local compliance obligations going forward.

Bonar Mercer, Partner at Morton Fraser MacRoberts