Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The duration and complexity of the sale process differs depending on whether the seller is running a competitive sale process and on the size and nature of the transaction. A common deal timetable for a competitive process would be as follows:
- seller’s due diligence and transaction documents: preparation of an information memorandum, legal and financial due diligence reports, relevant financial modelling and sale agreement (up to eight weeks);
- indicative proposals: after the negotiation of the relevant confidentiality agreements, interested buyers are provided access to certain of the due diligence materials and invited to submit an indicative first offer (three weeks);
- binding proposals: bidders who are invited into the second round are provided a shorter period in which to undertake confirmatory due diligence, and may be offered meetings with management and the seller’s legal and financial advisers. Bidders are then invited to submit their binding offer, which will usually annex a marked up version of the sale agreement for consideration by the seller (two weeks);
- negotiation and signing of transaction documents: the bidder whose binding offer is accepted is then the selected bidder and will be invited into the final negotiations on the sale agreement and other transaction documents, with the signing of the documents to follow (this may also include the provision of black box due diligence materials) (two to four weeks); and
- completion: depending on the complexity of the conditions precedent, completion can occur anywhere between one week and a number of months after signing of the transaction documents.
A deal of medium complexity will ordinarily run between two to three months, although accelerated timetables are not uncommon.Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
Acquisitions and disposals of privately owned companies or assets are called unregulated M&A transactions, which means that they are outside the jurisdiction of the stock exchange listing rules and are only in certain respects governed by the Corporations Act 2001 (Cth). The rights and obligations of parties in private transactions are therefore mainly governed by the principles of contract law and principally by the share or asset sale agreement that is executed by the parties. However, a transfer of shares or transfer of a business in most circumstances triggers compliance with other laws - for example, the Fair Work Act 2008 (Cth) and applicable tax regimes. While it is possible to have a sale agreement that is governed by the law of another jurisdiction, it is uncommon for this to occur unless the sale is in the context of a broader global transaction that involved a downstream Australian component. In this circumstance, the parties would need to comply with all the laws of Australia that may be enlivened by the transaction (whether that applied to the transfer of shares or transfer of a business).Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
The legal title that is acquired in shares as part of an acquisition is ‘clear title’, which means there are no third parties that have a claim of title to the shares. The register of members maintained by a company is the primary proof of shareholding (in the absence of evidence to the contrary). In a share sale scenario, the proof of transfer of title that would ordinarily be required by a buyer is the provision of a validly executed instrument of transfer, a share certificate, minutes or resolutions approving the transfer and an updated company register. In an asset sale agreement, title to assets passes by operation of the sale agreement, which will include a title and risk clause stipulating that title, possession and risk pass to the buyer at completion. Certain assets may also require the parties to undertake a specific transfer of ownership process stipulated by a third-party regulator or authority (ie, motor vehicles or licences).
In Australia, legal and beneficial title are distinct concepts and trusts are commonly used for tax reasons.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Except in limited instances, a buyer will require all shareholders to sign and be bound by the sale agreement. In almost all transactions involving multiple selling shareholders, the shareholders of a target will have in place a shareholders’ agreement that will include drag and tag clauses and a number of pre-emptive rights. Such rights may also be included in the company’s constitution. A sale agreement will have a clause that states that (with effect from completion) each shareholder waives (in favour of the buyer) all rights of pre-emption that the shareholder may have.
The circumstances in which the drag and tag and pre-emptive rights can be exercised will vary, particularly in circumstances where there are shareholders with greater bargaining power (which can result in those shareholders having greater rights and protections in the shareholders’ agreement).Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
A buyer is usually in a position to select which assets and liabilities it wishes to acquire as part of the transaction, and this will often guide whether the transaction is structured as a share or an asset sale. The ability to select assets and liabilities will of course be more limited in a share sale - while certain assets can be transferred out of the target, this is obviously more difficult in relation to certain obligations that sit with the company (such as employment rights of employees). There are, however, certain liabilities that cannot be ‘carved out’ in an asset sale - for example, if a buyer wishes to acquire a manufacturing plant by way of an asset sale, any liability for environmental matters will not rest solely with the seller entity. Rather, such liability is said to ‘run with the land’ and will also be assumed by the buying entity. Change of control consents (from financiers, landlords, etc) are also very common in Australia (see question 7).Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
There are two principal regulators that have jurisdiction over private M&A transactions in Australia: the Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission (ACCC).
Foreign investment into Australia that meets certain monetary thresholds and criteria will require FIRB approval. In circumstances where the investor is a foreign government investor, a zero dollar threshold applies. The Australian Treasurer (acting on the recommendation of the FIRB) has the power to prohibit any proposed investment or acquisition by a foreign person (that is not exempt under the applicable legislation) that is contrary to Australia’s national interest. Depending on the type of transaction, if FIRB approval is not obtained, the Treasurer has the power to unwind the transaction or impose criminal penalties.
The ACCC administers the Competition and Consumer Act 2010 (Cth) (CCA), which, inter alia, prohibits an acquisition of shares or assets if the acquisition is likely to have the effect of substantially lessening competition in a market in Australia. Under the CCA, the ACCC may apply to the Federal Court for a variety of orders, including the unwinding of a transaction, an injunction or pecuniary penalties.
If a transaction requires either FIRB approval or ACCC clearance, these consents will be included as a condition of the relevant sale agreement.
Are any other third-party consents commonly required?
Other than the shareholder consent described in question 4, each transaction will include a number of third-party consents that the buyer or seller will require as conditions of the contract. This includes regulatory consents (see question 6), consents from facility providers and consents from counterparties under material contracts. These material contracts will usually include leases and key customer contracts, but may also extend to certain IT agreements and supplier contracts.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
For private share acquisitions, there are regulatory filings that are required to be made to the Australian Securities and Investments Commission (ASIC). These filings must be made within 28 days of the date the change to company details was effected. The usual type of updates that will be required are changes to shareholding, changes to the ultimate holding company, changes to officeholders and changes to the registered office or principal place of business of the company. The Australian Tax Office (ATO) must also be notified of any change to the public officer of a company (being the company’s representation to the ATO) within 28 days of the change.
For both share and business acquisitions, there may also be other notifications that must be made for any licences or registrations that are used by the business, and that either must be notified of a change of ownership or will need to be transferred to the new business owner. The nature of these notifications will vary depending on the business the subject of the transaction.