At QR Lawyers we specialise in assisting both ASX listed companies and private companies with acquiring public and private companies.
This article sets out some of the key aspects that you need to consider when acquiring private companies in Australia.
Firstly, it is important to consider which purchasing structure will be most suitable to your needs. This choice needs to be mindful of the structure and assets of the target company.
The most common way of acquiring private companies is to obtain either:
- Some or all of the assets that comprise the business also know as an “Asset Sale”; or
- The shares in the company that operates or controls the business. This gives the buyer control over all the business’s assets, commonly referred to as “Share Sale”.
What are the main advantages and disadvantages of a share purchase compared to an asset purchase?
A. Share Sale
When acquiring a company through share sale the buyer inherits all known and unknown liabilities of the target company. While the introduction of warranties, indemnities, and insurance can mitigate these risks, the post-closing creditworthiness of the seller and warranty limitations can render claims ineffective. Generally, buying through a share sale requires a more detailed, time-consuming, and costly due diligence process. This is because the buyer will inherit the target company’s liabilities on completion. If the buyer or seller wants to exclude an asset, they must transfer it out of the target before closing. Furthermore, employees remain employed by the target company after closing.
The assets of the target company are acquired when the shares are transferred to the buyer. There is no need to transfer each asset individually, making this part of the process time efficient. This also makes a share purchase well-suited for complex businesses where transferring each asset would be difficult and impractical. Lastly, the target company’s existing contracts continue after closing, subject to any change of control provisions.
A cautionary note: even though assets do not need to be transferred, often agreements with third parties will include a change of control clause which is triggered by the changes in directorship and shareholding requiring consent of the third party for the transaction.
B. Asset Sale
The other option is to acquire a company through an asset sale. Here, you take control of a company through purchasing some or all of its assets. The buyer is only responsible for the seller’s pre-completion liabilities that it agrees to assume or those that transfer automatically. The buyer can therefore choose (or “cherry-pick”) which assets to acquire, employees to retain, and contracts to be assigned or novated to it. Employees do not transfer automatically in an asset sale unlike in a share sale. Where land is involved, some liabilities run with the land, including land tax, utility rates, and environmental liabilities which automatically form part of the transaction.
Moreover, security interests and encumbrances (such as a mortgage over land) may be attached to the relevant asset and will transfer with the asset. A failure to identify security interests and encumbrances, or to obtain a release or discharge at closing, may lead to the asset remaining encumbered after closing. If the seller subsequently becomes insolvent or defaults under its security agreement, the security holder can enforce its interest by seizing the asset or selling it. One of the key disadvantages with an asset purchase is that it often requires the approval of third parties. This is since contracts must be assigned or novated to the buyer or renegotiated for them to remain afoot.
Why is Due Diligence so important?
Conducting comprehensive due diligence is imperative to assess the risks, liabilities, and potential issues with an acquisition. It involves examining financial records, legal compliance, intellectual property, contracts, and any relevant operational aspects. Understanding the target company’s market position, competitive landscape, and growth prospects is vital for informed decision-making.
Your firm needs to conduct due diligence before any contracts are signed to ensure you have a full picture of what you are purchasing. The process can take a few days to several months, depending on the scale and complexity of the purchase and how long it takes to obtain and review the information about the business. Therefore, we suggest starting this process early. You may wish to include a ‘period of due diligence’ in the sales contract. This will allow you to terminate the agreement if any issues are uncovered that could seriously affect the business’s success.
What Regulatory compliance factors do you need to consider?
Navigating Australia’s regulatory framework is fundamental in ensuring your purchase of a business complies. The Australian Competition and Consumer Commission (ACCC) plays an important role in assessing the competition impacts of mergers and acquisitions to ensure they do not substantially lessen competition. Completing a detailed due diligence process is key in ensuring that any risks or legal compliance issues are discovered pre-acquisition.
How will you be Financing the acquisition?
Another crucial factor in business acquisitions is understanding and securing finance. If you are looking to obtain a bank loan, then it is likely that you will be required to provide a guarantee. You must not take bank guarantees lightly and make sure to carefully review them before signing. At QR Lawyers we have extensive experience in reviewing and assisting individuals and companies with guarantee documents to ensure that all parties understand the risks involved.
Will FIRB Approval and Foreign Investment Regulations apply?
Understanding and complying with the Foreign Investment Review Board (FIRB) process can be tricky, particularly if you know that there are going to be foreign investors. Recent reforms have tightened regulations, emphasising national interest considerations. FIRB approval requires a detailed approach to comply with its evolving foreign investment regulations.
Foreign persons generally require FIRB approval before acquiring interests in securities or assets, or taking part in other actions in relation to corporations, unit trusts and businesses that have a connection to Australia. Notably, Foreign persons normally require approval before acquiring a “substantial interest” (generally at least 20 per cent) in an Australian entity that is valued above the relevant monetary threshold.
At QR Lawyers we offer start to finish, and ongoing legal support to clients in their acquisition and corporate endeavours. We will be happy to advise you on the most suitable purchasing method or completing the necessary due diligence processes.
Feel free to touch base with our friendly team of legal professionals if you have questions regarding acquiring private companies.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.