Structure and process, legal regulation and consents
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.
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?
In Australia, 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).
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.
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).
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.
Must regulatory filings be made or registration 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.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Both sellers and buyers will usually appoint their own corporate advisers and tax and financial advisers. Corporate advisers provide strategic input on structure, pricing and (in a competitive process) the target bid, and manage the timelines of the transaction. Tax and financial advisers will undertake due diligence on the target and advise on all accounting and tax elements of the transaction (including the transaction documents). Depending on the nature of the business conducted by the target, it is not uncommon for a buyer to engage specialists for due diligence, particularly if the prospective buyer is not familiar with the industry or jurisdiction. It is not uncommon for corporate advisers to be paid by way of a success fee.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Transaction documents will usually contain an obligation of good faith, principally in the terms sheets and any memoranda of understanding, regarding the transaction. This is, of course, a contractual term as opposed to any general legal duty to act in good faith. Australian courts have not always been consistent in when such a clause will be deemed enforceable and what the content of the duty is, but broadly it involves the following principles: that each party must act honestly, must have regard to the legitimate interests of the other party, and must not act arbitrarily, capriciously or with the intention to cause harm to the other party. The duty does not, however, restrict a party from seeking to strike the best possible bargain in its interests and does not impose exclusivity.
The directors of the buyer and the seller are also subject to a number of general law and statutory duties, including the duty to act in the best interests of the company. The shareholders’ agreement may also include an obligation on each shareholder to act in good faith when dealing with the other shareholders and to otherwise act reasonably in all matters relating to the company.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
Parties will customarily enter into the following documents when acquiring shares, a business or assets:
- a heads of agreement or term sheet (generally on a non-binding basis) setting out the terms on which a more formal sale and purchase agreement will be drafted;
- a sale and purchase agreement setting out the terms under which the sale will occur. Additional provisions will be inserted for an acquisition of a business or assets relating to the specific assets and liabilities being transferred (including assignment of material contracts, assets, intellectual property, employees, tax indemnities, and rectification of any misallocation of assets and liabilities);
- a disclosure letter provided by a seller that qualifies the warranties given by the seller in the sale and purchase agreement;
- a transitional services agreement that provides for the provision of certain services by the seller or its related bodies corporate to the target, business or purchaser post-sale; and
- documents effecting the transfer of shares or assets and, in respect of an asset sale, deeds of assignment or novation for third-party contracts.
Are there formalities for executing documents? Are digital signatures enforceable?
Australian law documents are able to be executed as ‘agreements’ or as ‘deeds’ in accordance with the requirements under the Corporations Act 2001 (Cth). Documents in Australia are customarily executed under section 127 of the Corporations Act (for agreements and deeds) by two directors of the company, one director and a company secretary of the company, or by common seal of the company.
Certain types of documents must be executed as ‘deeds’, including transfers of land, mortgages and charges, and powers of attorney. Additional signing, sealing and delivery formalities must be observed for the execution of deeds by an individual that vary slightly in each state or territory, including that the execution must occur in the presence of a witness. The failure to observe any applicable formalities may render a document unenforceable.
Electronic signatures for the execution of agreements are enforceable in some instances under the Electronic Transactions Act 1999 (Cth) (and corresponding legislation in force in each state and territory) provided certain conditions are met. However, it is customary in Australia for original documents to be executed in person and that original counterparts be provided to counterparties.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
Legal due diligence in Australia will generally confirm title to the shares in a company or assets in a business, the legal structure, terms of financial obligations, terms of material contracts, ownership and use of information technology, intellectual and real property, employee arrangements, material litigation and compliance with the law.
Seller due diligence reports are generally a feature of larger sales or sales of highly regulated businesses. Seller due diligence reports are generally reported on a ‘red flag’ or ‘exceptions-only’ basis. It is customary for a buyer to conduct its own due diligence process, which is ordinarily more detailed than the seller due diligence process. It is not uncommon for a successful buyer, and its lenders, to be able to rely on a seller due diligence report.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
A seller can be liable for pre-contractual misrepresentations where such representations amount to ‘misleading and deceptive conduct’ or conduct ‘likely to mislead or deceive’ under the CCA. Silence, in some circumstances, can be misleading and deceptive where there is a reasonable expectation that a certain matter or fact ought to be disclosed. Liability cannot be excluded for misleading and deceptive conduct, although recent case law suggests that parties may be able to limit or cap their liability for misleading and deceptive conduct in some circumstances.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
Australian companies are required to notify ASIC of certain matters, details of which are publicly available online (at a cost), including the solvency status of a company, details of directors, share capital and shareholders (including ultimate beneficial ownership). Details of the charges registered against a company, including against assets held by the company, are available (for a nominal cost) on the Personal Properties Securities Register.
Details of the ownership of real property, mortgages and charges and other attributes of real property are available at the land registry office of each state and territory. Details of registered intellectual property, such as patents and trademarks, can be obtained from the registers held by IP Australia, Australia’s intellectual property rights administrator. It is usual for court searches to be conducted to ascertain whether a company is involved in any material litigation.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
A sale and purchase agreement would customarily exclude matters within the buyer’s actual, constructive or imputed knowledge, and such knowledge will qualify the seller’s warranties.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Pricing is generally determined on a cash-free, debt-free basis based on a normalised earnings before interest, tax, depreciation and amortisation (EBITDA) multiple. The use of closing or completion accounts are the common means by which the purchase price is adjusted to correctly reflect the difference in the estimated working capital against the actual working capital. Locked-box pricing structures are less common in Australia.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Consideration is customarily payable by cash or a combination of cash and shares in the acquiring vehicle or its ultimate parent in private M&A transactions.
The choice between cash and share (ie, ‘scrip’) consideration is heavily driven by tax considerations. Scrip consideration may allow the seller shareholders to ‘defer’ the immediate tax consequences of any gain on disposal where rollover relief is available.
There is no obligation to pay multiple sellers the same consideration in respect of an acquisition by way of a sale and purchase agreement, although a conventional drag-along provision will require the same terms.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Earn-outs, deposits and monetary escrows are common, but not customarily used for private M&A transactions in Australia.
Earn-outs are negotiated where the buyer is concerned about the future performance of the business. When used, earn-outs are generally calculated by reference to the EBITDA performance milestones for a period of one to two years post-sale. Earn-out arrangements are often considered to be a separate asset to the terms of the sale under Australian tax laws, and accordingly are not generally used unless tax advice has been obtained before the transaction has been finalised.
Deposits are not generally used in larger, negotiated transactions, but may be negotiated in smaller transactions. Retention amounts (up to 30 per cent of the purchase price) held in escrow may be agreed by the parties to act as security for warranty claims, and are wholly or partially held for the duration of the warranty claim period.
How are acquisitions financed? How is assurance provided that financing will be available?
Private M&A acquisitions are commonly funded by bank finance in Australia, with the use of funding provided by private equity investors or alternative financiers becoming more common.
Where bank finance is being secured, the sale and purchase agreement will often include a condition precedent to completion requiring that the debt financing is secured by the purchaser on terms reasonably acceptable to the purchaser.
Where the funding is being secured by way of private equity investment, the seller will customarily be provided with an enforceable equity commitment letter conditional on satisfaction of the conditions precedent set out in the sale and purchase agreement.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
The Corporations Act 2001 (Cth) prohibits a company from giving financial assistance for the purchase of its shares or the shares of its holding company if that assistance results or would result in ‘material prejudice’ to the company or its shareholders, or to the company’s ability to pay its creditors. The prohibition applies even if the assistance is provided to acquire shares in a holding company that is incorporated outside Australia.
A potential breach of the financial assistance prohibition can be overcome (a whitewash) by both private and public Australian companies by either a special resolution of shareholders of the company (in relation to which no votes can be cast in favour of the resolution by the person acquiring the shares) or by a resolution of all ordinary shareholders of the company. In either case, a special resolution of the shareholders of any company that will be a listed Australian parent corporation or the ultimate Australian holding company following the acquisition must also be passed.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Transactions are frequently subject to conditions, with typical types of conditions in sale documents including the following:
- foreign investment and FIRB clearance;
- ACCC approval;
- shareholder approvals;
- corporate consents;
- board approvals;
- legislation or regulation requirements;
- specific sector regulations;
- no occurrence of any material adverse change to the business or material breach of warranty; and
- change of control or assignment consents for material contracts and leases.
The seller will wish to resist any condition where the purchaser’s discretion is relevant to the satisfaction of the condition.
It is important to consider, at an early stage, whether notification of a proposed transaction is required under the Foreign Acquisitions and Takeovers Act 1975 (Cth), as non-compliance with the regime is a criminal offence and can lead to a possible divestiture order in relation to the relevant shares or assets acquired.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
The parties should exert at least their reasonable efforts to fulfil closing conditions. A more burdensome best efforts standard may be agreed that can require the expenditure of money, but it is not an absolute obligation to achieve the specified outcome. The obligations placed on a buyer or a seller will depend on the commercial agreement between the parties, their respective bargaining power, the level of control that a party has in respect of the satisfaction of a closing condition, or a combination of any of these.
Sellers, particularly when conducting an auction process, will usually try to impose a ‘hell or high water’ standard obliging the buyer to take all necessary steps to ensure regulatory approval. This could include disposing of parts of its or the target’s business, and commencing litigation.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Where a transaction is subject to conditions it is normal for the buyer and seller to agree a regime of pre-closing covenants. The buyer will want to ensure that the value of the company or business and its goodwill are not reduced before completion. Generally, this is achieved through the use of both positive covenants (requiring the seller to do things during the period before completion) and negative covenants (prohibiting the seller from doing certain things during the period before completion without the purchaser’s permission).
Common covenants in the case of both share and asset acquisitions include the requirement to consult the purchaser in relation to the conduct of the business in general and to carry on the business in the usual and ordinary course, which is the most general, overarching obligation.
The remedy for a breach of covenant is typically a claim by the buyer for damages. The limitations and caps that apply in the case of warranties do not in the normal course apply to the contractual covenants in the case of which, if damages are not an adequate remedy, the Australian courts may make an order for specific performance, although this is rare.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Absent the failure of a party to satisfy a condition that they are responsible for, or a condition becoming impossible to satisfy, and in either case that may not be waived, it is unusual for a party to have the right to terminate a sale and purchase agreement prior to a pre-agreed long-stop date.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
While break-up fees and reverse break-up fees may sometimes appear in larger or competitive bid transactions, they are not particularly common in private M&A. Such fees are routinely used in public M&A transactions and are relatively standardised. In respect of public M&A transactions, guidance issued by the Takeovers Panel stipulates that break fees should not ordinarily exceed 1 per cent of the equity value of the target. While reverse break-up fees are not similarly restricted (and can therefore be the subject of negotiation), in practice the value of reverse fees usually reflects a similar percentage to that of a break-up fee. There are a number of possible limitations on agreeing to provide a break-up fee, including that the fee may constitute the giving of financial assistance (in contravention of section 206A of the Corporations Act 2001 (Cth)).
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
Almost all sale agreements will include a set of representations and warranties. The representations given by a seller will usually relate to capacity and solvency, while the scope, extent and nature of warranties will vary depending on whether the agreement is seller or buyer-friendly. At a minimum, a limited set of warranties will be provided in relation to solvency, share capital, accounts, records, business contracts, employees, superannuation, litigation, intellectual and real property, insurance, the environment and compliance with laws. In buyer-friendly transactions, it is common for a buyer to obtain a robust warranty relating to the information provided by the seller in the due diligence phase.
The inclusion of any indemnities is the subject of (often rigorous) negotiation. A buyer-friendly agreement may include a general indemnity for any loss associated with a breach of warranty, a specific indemnity for any issues identified by the buyer in the course of its due diligence (eg, arising from a litigation dispute or environmental liability) and a tax indemnity.
A warranty is a contractual assurance, which means a breach of a warranty constitutes a breach of contract. This means that a wronged party alleging a breach must prove loss and is subject to all the usual limitations on recovery for a breach of contract (mitigation, remoteness). For a breach of a specific indemnity, the wronged party is able to recover all loss it suffers as a result of a breach of the indemnity and does not have a duty to mitigate such loss. The other key difference between warranties and indemnities is that a buyer will be prevented from claiming a breach of warranty where the facts or circumstances underlying the breach were within the knowledge of the buyer. In an alleged breach of indemnity, knowledge of the buyer will not prevent a claim.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
Sellers will attempt to limit their liability under a sale and purchase agreement by:
- resisting the number and scope of warranties given in the document;
- qualifying warranties by awareness of the seller or sellers and by making proper disclosure against those warranties that are given;
- restricting the buyer’s ability to claim under the warranties for any individual claim except where it exceeds a monetary threshold and only if the aggregate of all claims exceeds the de minimis threshold (either a monetary threshold or total percentage of the purchase price);
- restricting the period within which the buyer can claim against the seller or sellers: usually 12 to 36 months post-closing. In some cases, a longer period is agreed in respect of claims against the tax warranties;
- restricting the types of loss that the buyer can claim: consequential loss is generally excluded, and the definition of consequential loss is ordinarily quite prescriptive as a result of recent case law regarding the interpretation of ‘consequential loss’;
- excluding liability of the seller or sellers where the buyer had knowledge of the breach of warranty or contributed to the breach, or both; and
- capping the maximum liability of the seller or sellers under the agreement, generally at 100 per cent of the purchase price.
The agreement will also specify a procedure that the buyer must comply with to make a claim, for example, the time frame within which the buyer must notify the seller or sellers of its intention to make a future claim; and the time frame within which the future claim must formally be made or, if a claim can be made under the existing insurance policies maintained by the company or from third parties, that the buyer must first make a claim for the loss under that policy or from that third party before making a claim against the seller or sellers.
The agreement will also specify that losses that are recovered from third parties or insurers are not able to also be claimed from the seller or sellers.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Warranty and indemnity (W&I) insurance has become a common feature of the Australian private M&A market over the past few years. Private equity funds have adopted W&I insurance enthusiastically. Where a private equity fund is a seller, a W&I policy enables it to both maximise the sale proceeds actually received on completion, without escrow or retention, and then to return those sale proceeds to its investors efficiently, and to ‘stop the clock’ on the calculation of the investment returns without having to hold any amounts back to fund any possible claims under the sale and purchase agreement. Where a private equity fund is the buyer, W&I insurance can also avoid the undesirable situation where a private equity shareholder is claiming against a member of its own senior management team who may have been a seller in the sale and purchase transaction.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Parties will typically agree the following post-closing covenants:
- Restraint of trade: it is customary for a buyer to require that the seller or sellers enter into restrictive covenants restraining the seller or sellers from using a name similar to or including the trade names of the business, establishing a similar or competitive business within a specified geographic area of the business, soliciting customers or clients of the business, and enticing current or future employees away from the business during a specified time period following closing. For a restrictive covenant to be enforceable in Australia, the terms must not go beyond what is reasonable to protect the goodwill of the business and must not be contrary to public policy, otherwise the restraint will be deemed void.
- Confidentiality: each party will be required to keep and treat as confidential the other party’s information (regardless of format) provided as part of the transaction, except in certain limited circumstances: for example, where required by law to disclose the information. Confidentiality obligations generally survive the termination of the sale and purchase agreement and continue indefinitely.
- Press, customer and employee notifications: in some circumstances, the parties will agree the terms of any press, customer or employee announcement in the sale and purchase agreement.
- Access to records: for a specified period post-closing (generally five to seven years), the buyer will allow the seller or sellers access to records to the extent that those documents are required to assist with the satisfaction of a legal obligation.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Transfer taxes (stamp duty) are not levied on a transfer of shares unless the target entity (directly or indirectly) holds interests in land over a threshold value (generally A$1 million or A$2 million, depending on the state or territory, although note that there is no value threshold for the Australian Capital Territory). A transfer of a direct interest in land is generally subject to stamp duty. A transfer of other business assets (including intangibles) may attract stamp duty depending on which state or territory the assets are located in. The rate of duty for unlisted entities is generally up to 5.75 per cent. Surcharge rates may apply to direct or indirect acquisitions of residential property by foreigners.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
A transfer of shares or a transfer of the underlying business or assets can give rise to income tax implications for the seller. In share sale transactions generally, capital gains tax will be most relevant. In a sale of a business or assets, the types of assets being sold will often determine the potential Australian tax implications. The corporate tax rate in Australia is generally up to 30 per cent.
A sale of shares does not attract goods and services tax (GST). Generally, the sale of a business or assets attracts GST unless the sale qualifies for, and the parties elect to treat the supply as, a GST-free ‘going concern’. The rate of GST is generally 10 per cent, to be paid by the supplier.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
When a buyer acquires shares in a target company, the legal entity that employs the employees remains unchanged. Therefore, the employees of the target company ordinarily continue to be employed by the target company following the sale, unless some independent action is taken by the employing entity to terminate the employment.
Employees do not automatically commence employment with a buyer where the buyer acquires only the business or assets of the target company. As the buyer has not purchased the shares in the target company itself (ie, the legal entity that employs the employees), the employees do not automatically transfer with the sale. If the buyer wishes to employ the employees following the sale, the employees can be offered employment with the buyer (which the employees are free to decline). There are no ‘transfer of undertaking’ considerations under Australian law.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
The obligation to consult is found under statute, industrial awards and also enterprise agreements made by the parties. Generally speaking, an employer will be required to consult with its employees (or their representatives) in relation to a decision to introduce major changes to the workplace that are likely to have a significant effect on employees. In an asset sale, the obligation will be enlivened. The obligation may also be enlivened during a share sale, depending on the extent of the consultation provision in an enterprise agreement.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
Following a share sale, as employees remain employed by the same company, their length of service and accrued entitlements will continue unaffected.
It is usually (but not always) a requirement of an asset sale agreement that offers of employment made by the buyer include a commitment to recognise employees’ service with the target company prior to the sale. Where this occurs, the employees’ accrued leave balances will transfer with them to the buyer and the employees will not be entitled to any redundancy pay from the target company under relevant legislation.
There is usually not a requirement to transfer superannuation balances, as most employees place their superannuation with independent retail or industry funds. There may be a need to transfer superannuation balances if the fund is an employer-based fund and the employing entity changes.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
A key driver of M&A activity in financial year 2017 was strategic acquirers looking to ‘buy growth’ in mature industries with low organic growth prospects. For strategically driven acquirers, they are prepared to offer healthy premiums to acquire targets that can deliver immediate access to new geographic regions, complementary products or know-how.
Foreign investment continued to drive local M&A. Tightened capital controls on cashflow from China have been imposed, potentially dampening interest from Chinese bidders in local assets. Increased activity from buyers in Japan, Europe and America is counter-balancing that impact.
Private equity in M&A activity has had a strong resurgence that is expected to continue.
An emerging trend is private equity using the consortium model to undertake acquisitions. We expect this trend to continue.
Globally, there is heightened competition for quality assets from alternative investors such as pension funds, which are willing to participate in consortia seeking to acquire Australian targets. Activity from regulators is vigilant and transactions are being rigorously reviewed where appropriate. FIRB is increasingly working with the other regulators, who now play a greater role in the consultation process - for example, the ACCC, ATO and the newly established Critical Infrastructure Centre. In addition to its consultation role, the ATO also has a role in screening applications and compliance monitoring. We have seen an increase in the use of conditions imposed on FIRB approvals, particularly around the standard tax conditions. There have also been deals that required a tax deed to be signed by the purchaser that protects against, for example, shifting profits offshore so that less Australian tax is paid.