In our first two blog articles in this series (“Proper preparation prevents poor performance”) and (“Get your backyard in order”) we gave 6 initial tips for potential sellers to consider before embarking on the process of selling their business.  Our next 4 tips relate to the transaction documents:

Tip 7 - Try to get drafting control for transaction documents

Transaction documents typically include sale and purchase agreements, new employment contracts, transitional services agreements, contract assignment or novation agreements, new leases or assignments of existing leases, shareholders agreements, property conveyance agreements, etc.  It is worth considering at the start of the transaction all potential documents that may be required.

Sellers often fall into the trap of thinking that they will save costs by getting the buyer to prepare the first draft of all transaction documents.  There are 2 main risks with this approach:

• The seller may end up in a far worse position because the buyer is likely to produce buyer friendly transaction documents; and
• Substantial costs can be involved in negotiating the documents back to a reasonable position.

In our experience, it is better to be “commercial” when preparing transaction documents (as documents that are too one-sided will often lead to lengthy negotiations).

Tip 8 - Try to avoid earn-outs (and other forms of deferred consideration) as a seller

An earn-out is a deferral of part of the purchase price pending certain events occurring.  Typically, this is usually linked to performance of the business after it has been sold.  From the seller’s perspective, it is best to avoid earn-outs and other forms of deferred consideration, as they create risk and often lead to disputes.

If you must have an earn-out or other form of deferred consideration, try to reduce the proportion that is deferred compared to the consideration that you will receive upfront at completion.  Think about whether you would still do the deal if the deferred amount was never ultimately paid.

Consider appropriate protection mechanisms to reduce the risks associated with the earn-out or other form of deferred consideration.  For example, negotiating security over the business or other assets of the buyer, becoming a director of the buyer until all deferred payments have been made, imposing restrictions on the conduct of the business during the earn-out period, accelerated payments if certain events occur (e.g. if the buyer on-sells the business or key assets, or breaches other restrictions).

Tip 9 - Consider warranty protections in sale and purchase agreements

Other than the amount of the purchase price, warranties are probably the biggest part of any negotiations in a business sale transaction.

It is important to consider warranty caps, collars, and other restrictions.

A seller should try and have all documents disclosed as part of due diligence apply as a carve out to any warranty claim.  This reinforces the importance of a comprehensive data room.

Be careful with any request by the buyer for security for warranty breaches (e.g. personal guarantees or deferred purchase price).

Depending on the size of the transaction, consider whether either buy-side or sell-side warranty and indemnity insurance is required.

Tip 10 - Minimise conditions precedent

Especially avoid broad conditions precedent that make it easy for buyer to back out of the deal (e.g. conditions that make the overall transaction subject to finance or subject to satisfactory due diligence).

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.

In our last blog article in this series (“Proper preparation prevents poor performance”), we gave 3 initial tips for potential sellers to consider before embarking on the process of selling their business.  Our next 3 tips concern due diligence and indicative offers:

Tip 4 - Get your backyard in order

Consider and collate the documents/information that a potential buyer will want to see when conducting due diligence on your business.  It is important to get everything in order before entering into discussions with a potential buyer to determine whether there are any gaps or errors in the information (or documentation which can be corrected before due diligence commences).

If you are able to give a potential buyer correct and up-to-date due diligence documents, this is likely to help give the potential buyer comfort, enhance value and lessen the severity of warranties and indemnities that may need to be agreed with the ultimate buyer.  Missing documents (or gaps in information) can have the reverse effect.

Tip 5 - Use a non-binding indicative offer/heads of agreement

An indicative offer/heads of agreement/letter of intent is a good way of setting expectations with parties in relation to the potential terms of the deal and the proposed timetable.

These documents should be non-binding, except for confidentiality terms (and possibly for terms dealing with exclusivity and break fees, if applicable).

Tip 6 - Allow for a comprehensive due diligence process

It is important to have a well organised and comprehensive data room.  A data room is important for a few reasons:

• The content of the data room forms the basis on which a potential buyer will determine its offer price for your business.  So, in simple terms, a disorganised/deficient data room can often result in a lower offer price (or the buyer requesting onerous terms and conditions in the sale and purchase agreement to protect its position).
• An effective data room can also give powerful tools to the seller (e.g. document security mechanisms, the ability to monitor who is reviewing what documents and for how long, and an effective process for submitting, answering and recording requests for further information).
• If important information is missing from the data room (or there is any false or misleading information) and the deal goes ahead, then this may result in the buyer suing the seller in the future for breach of warranty or misleading and deceptive conduct.  So it’s important to have an accurate record of exactly what was disclosed to the buyer to assist with any future claims.

Sellers should consider using a virtual data room with document security controls (e.g. restrictions on copying, printing or sharing documents) rather than an online file sharing service.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.

The commonly known “5 P’s” of success (“proper planning/preparation prevents poor performance”) are as relevant to the sale of your business as in other areas of life.  If you are proposing to sell your business, proper planning, and preparation before entering into any discussions with potential buyer(s) will assist you in obtaining the best possible price for your business, limit delays and reduce exposure to risks.

Over the next few weeks, we will highlight some of the top tips and traps for individuals and companies that are looking to sell their business.

Tip 1 - Determine the best corporate structure for a future sale of your business

What is the best corporate structure for a future sale of your business?  A company, unit or discretionary trust, sole trader, other?  While the immediate considerations for most businesses are legal and financial risk minimisation in the operation of the business, when structuring your business, always plan for the possibility of a future exit.  Don’t wait for an exit (or possible transaction) to start thinking about the structure of your business.  If you are trying to restructure a business immediately before a sale, this could:

• delay the transaction;
• scare off buyers;
• cause additional expense; and
• have adverse tax consequences, for example if assets have to be moved across various entities.

Tip 2 - Appoint your advisers early

• Advisers could include corporate advisers, lawyers and accountants/tax advisers.
• Appointing your advisers early will limit the risk of things going in the wrong direction from the start and a seller agreeing to commercial terms with a buyer without understanding the full implications of those terms.
• Advisers need to be experienced in M&A transactions.
• Obtain cost estimates from advisers up front, ideally with fee caps or fixed fees and consider incentives for corporate advisers to maximise the sale price.

Tip 3 - Share sale vs asset sale

• Consider how the transaction is to be structured – for example, the shareholders selling their shares in a company (share sale) or the company selling its assets (asset sale).
• The tax outcomes may be better for the seller if the transaction is a share sale, but buyers may be reluctant to take on the historical liabilities associated with the company.
• Buyers may prefer an asset sale as they can choose the assets to be acquired and leave behind most unwanted liabilities.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.

When arriving at the contract negotiation stage of selling your business or shares in your company, you are likely to be presented with a lengthy list of warranties by the buyer or its lawyers for inclusion in the sale and purchase agreement (SPA).  While seller warranties, like other terms of an SPA, are negotiable, it is usual for a comprehensive set of seller warranties to be included.

Warranties are a set of statements about your business or company on which the buyer relies in deciding to buy your business, or the shares in your company.  Those statements may be positive (eg, in carrying on the business, you or your company complied with all laws) or negative (such as, there are no claims by third parties against your business or company).  If a seller warranty turns out to be untrue (ie, you breach the warranty), you will be liable for any resulting loss suffered by the buyer.

Warranties will be given by the seller of the business or shares, but if the seller is a company, the buyer may require individuals associated with the seller (eg, its directors) to provide the warranties together with the seller, so that the buyer can bring claims for warranty breaches against any or all of the seller and those individuals.  

While seller warranties are a normal feature of a business or share sale, there are ways in which a seller can manage (and, in some cases, reduce) associated risks and liabilities.

Tip 1 – Disclosure is the key

It is usual (and reasonable) for seller warranties in the SPA to be qualified or limited by reference to all information disclosed (or ‘fully and fairly’ disclosed) by the seller to the buyer before the SPA is entered into.  The effect of that qualification or limitation is that the buyer will not be able to claim a breach of warranty has occurred if the matter giving rise to the claim was properly disclosed to the buyer by the seller before the SPA was signed.  To maximise your ability to rely on any disclosure qualification/limitation in the SPA:

• gather all relevant information and documents in relation to your business as soon as possible in the sale process and include it in a data room to which the buyer and its advisers are given access.  The information presented in the data room should be true and not misleading, as otherwise you could be exposed to claims by the buyer of breach of warranty (eg, a seller warranty to the effect that all information you provided was true and correct), or misleading and deceptive conduct.  This means that both positive and negative facts about your business or company ought to be disclosed, to give an accurate picture.  The data room should have facilities enabling the buyer and its advisers to request additional information and to ask questions, and for you and your advisers to answer them.  For evidentiary purposes, a record of all information (including questions and answers) included in the data room will need to be generated, and there should be a facility to enable the parties to download a copy of the contents of the data room at completion of the sale.  Electronic or virtual data rooms are ideal for those purposes.  There are various third party virtual data room platforms available for sellers to use.
• for added protection, the seller may also provide a disclosure letter or similar document to the buyer prior to signing the SPA, which sets out specific disclosures against specific seller warranties in the SPA.  The SPA would then need to provide that the contents of the disclosure letter also qualify the seller warranties, in the same way as information in the data room.

Note that if your disclosures reveal an issue of material concern to the buyer (eg, a claim or potential claim which might adversely impact the business or the company after completion of the sale), the buyer may insist on the inclusion of a seller indemnity in the SPA to cover the buyer for any loss it may suffer in relation to that specific issue.  Unlike the warranties, your liability under the specific indemnity will not be limited by disclosure, but you could seek to have other limitations apply, such as those mentioned in the next tip.

Tip 2 – Negotiate the inclusion of other warranty limitations and qualifications in the SPA

In addition to the disclosure qualification, it is normal practice for the seller’s (and other warrantors’) liability in respect of warranties to be limited and qualified in other ways under the SPA.  Typically:

• there is monetary cap on the seller’s and other warrantor’s liability.  The cap is usually a percentage of the sale price, up to 100%.  There will be a stronger argument for a lower percentage, the higher the sale price.  Also, there may be different caps for different types of liability (eg, breaches of title and capacity warranties, and some specific indemnities, may attract a higher cap);
• a minimum claim amount (and a minimum amount for a ‘basket’ of claims) is set, so that the buyer is precluded from bringing an individual warranty claim unless it exceeds a minimum claim amount, and until the total amount of all claims exceeds a minimum aggregate claim amount; and
• the buyer will have a time limit, after completion of the sale, within which to bring claims for warranty breaches.  There may be different time limits for different types of warranty claims (eg, tax claims may have a longer tail).  The time limit usually applies to the notification by the buyer of warranty claims, but it is advisable to also include a separate time limit for the buyer to issue legal proceedings for the claim after notification.  Otherwise, as long as the buyer gives you notice of a warranty claim by the claims notification deadline, the claim will be preserved, and the buyer will be free to issue proceedings against you long (even years) after the notification time limit expires.

Tip 3 – Warranty and indemnity insurance

It may be possible to obtain sell-side or buy-side warranty and indemnity insurance cover for breaches of seller warranties.  Whether such insurance is feasible (and obtainable) in a particular case will turn on the size and nature of the transaction and the circumstances of the target business or company.

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For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - LINK.

The Commonwealth has recently passed the Treasury Law Amendment (Cost of Living Support and Other Measures) Act 2022 (Cth) (ESS Act) which gives effect to the second stage of an overhaul of employee share schemes (ESSs) for Australian companies.  Together with the first stage of the overhaul that addressed the taxing of certain ESS interests, the general aim of the changes set out in Schedule 4 of the ESS Act is to make the implementation of ESSs easier for companies and more desirable for participants.  

What is an ESS?

ESSs are, in essence, arrangements for a company to offer securities (e.g. shares in a company) or interests in those securities (e.g. options to acquire shares in a company) to its employees, usually at a discounted price.  ESSs can be an effective tool to attract and incentivise staff.

Barriers to an ESS

However, in order to offer securities for sale, including to employees, companies are generally required to comply with the disclosure requirements under the Corporations Act 2001 (Cth), including by providing a document containing certain prescribed information (e.g. a prospectus or an offer information statement). The disclosure obligations in the Corporations Act are onerous and the cost and time involved in complying can be prohibitive for many SMEs and start-ups.  

There are some exemptions to the disclosure requirements in the Corporations Act, but before the ESS Act, the exemptions available in relation to the issue of shares to employees were narrow and restrictive.  For example:

• The Corporations Act allows an exemption for:
  - offers made to employees who are 'senior managers'; and
  - offers made (in any 12 month period) to no more than 20 persons (including employees) and where the amount raised does not exceed $2 million in total.

• The ASIC class order relief (Class Order 14/1001 (unlisted bodies)) applies only where (among other things):
  - The value of all offers to each participant in each 12 month period is no more than $5,000.
  - The ESS does not involve the employer group making a loan to the participant to fund the acquisition of the securities.

Additionally, companies wishing to implement an ESS have had to contend with the rules that required an operator of certain ESSs to hold an Australian financial services licence, as well as the advertising and hawking restrictions under the Corporations Act.

The new rules

Under the ESS Act (which comes into effect on 1 October 2022), if certain requirements are met in respect of an ESS, then for that ESS (Eligible ESS):

• the existing disclosure requirements and restrictions on advertising and hawking securities under the Corporations Act will not apply; and
• an Australian financial service licence will not be required by the operator (and general financial advice can be provided in relation to the Eligible ESS without an Australian financial service licence).

Requirements for an ‘Eligible ESS’

The requirements that an ESS must meet to be an Eligible ESS are still somewhat complex and largely depend on whether or not the participant is required to pay for the securities (or interests in securities) offered and whether or not the company is listed.  For offers made by unlisted companies that do not require a participant to pay for the securities (or interests insecurities) or borrow funds to pay for them, the key requirements to be an Eligible ESS include (but are not limited to):

• The offer must be for the issue, sale or transfer of:
  - fully paid shares;
  - a beneficial interest in a fully paid share; or
  - a unit in, an incentive right, or an option to acquire, a fully paid share,
  (ESS Interest).
• The offer must be made to a director, employee or service provider of the company (or certain persons/entities related to them).‍
• For an offer of options or incentive rights, an ‘offer document’ must be provided at the point of offer pursuant to Division 1A of Part 7.12 of the Corporations Act. The offer document must include certain prescribed information.

For offers by unlisted companies that do require a payment by participants, the key requirements to be an Eligible ESS include (but are not limited to):

• The offer must be for an ESS Interest.
• The offer must be to a director, employee or service provider of the company (or certain persons/entities related to them).
• The ESS Interest must be acquired by the participant who pays for the ESS Interest.
• The sum of the following two numbers must not exceed 20% (or such other percentage specified in the company’s constitution) of the interests actually issued in the company:
  - the number of interests that may be issued, directly or indirectly, as a result of the offer; and
  - the number of interests that have been issued, or could be issued as a result of previous offers, in connection with an employee share scheme made during the previous three years.
• The participant must not be charged more than $30,000 per annum (plus an additional amount for certain dividends and cash bonuses received and other amounts accrued by the participant).
• Any plan to allow a participant to make regular payments or elect to have regular deductions made from their wages or salary for the purposes of acquiring ESS Interests (Contribution Plan) must satisfy certain requirements, including that the participant must agree in writing to the terms of the Contribution Plan before participating.
• For an offer of options or incentive rights, an ‘offer document’ must be provided at the point of offer pursuant to Division 1A of Part 7.12 of the Corporations Act. The offer document must include certain prescribed information.
• The participant must be provided with a disclosure document 14 days before an offer is made (and, where the ESS Interest is an option or incentive right, before the ESS Interest can be exercised). The nature of the disclosure document required depends on the nature of the ESS Interest offered, but the requirements for a disclosure document are generally less onerous than the existing disclosure requirements.
• Where the company provides a loan to enable a participant to purchase the ESS Interests:
  - the loan must have no interest or fees payable;
  - in the event of default in the payment of the loan, the right of recourse against the participant must be limited to forfeiture of the ESS Interests acquired using the loan;
  - the borrower must be the participant who will acquire the ESS Interests; and
  - the loan cannot be provided to an existing shareholder.

Money received from participants for applications made under an Eligible ESS must be held in trust until the ESS Interests are issued or transferred, or the money is returned to the participant.

There are also new criminal offences introduced by the ESS Act relating to Eligible ESSs, including in relation to circumstances where the offer or disclosure document contains a misleading or deceptive statement or omission.

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What were you doing before Sierra Legal?

I was working part-time at a mid-tier firm. Prior to that I had some time away from practising law to look after my three kids – practising law is easier!

What do you do with your time when you aren’t advising on M&A deals and reviewing contracts?

Mostly still looking after those three kids – but rather than changing nappies I’m now a taxi service/administrative assistant for their hectic social and sporting lives! I also like to read and enjoy cooking and getting active – even just a quick walk to the beach makes my day so much better.

What was your first job?

Other than things like babysitting and helping in my dad’s business when I was a kid, my first ‘real’ job was waitressing. I really quite liked being a waitress, but I worked in the restaurant at a winery and I was terrible trying to explain the wine menu!

What was the first thing you bought with your own money?

I think it was Madonna’s ‘True Blue’ cassette tape. It’s possibly still one of the best things I’ve ever bought!

What was the last book you read?

I’ve usually got a few ‘on the go’ at once. The last book I finished was ‘The Yield’ by Tara June Winch. I’m also reading Stan Grant’s ‘Talking to My Country’ to continue my self-education on indigenous issues and the Palace Papers by Tina Brown for something a bit more light-hearted. And the odd chapter of Harry Potter when I’m allowed.

Favourite place?

‍I have many cities I love, but the place I feel most at peace is the bush – specifically the ‘scrub’ of Central-West New South Wales just after it has rained.

Favourite food?

Shellfish (preferably that someone else has ‘shelled’ for me!).

Least favourite food?

Mint. Peppermint, spearmint, whatever – it’s all gross.

Best advice you have received?

Every time I think of taking a shortcut, I hear my Grandad saying ‘if something’s worth doing, it’s worth doing well.’ That advice has been both a blessing and a curse throughout my life! Perhaps the best advice is from my dad: ‘You’ve always got to like the person looking back at you in the mirror’.

ASX has announced changes to the annual and subsequent listing fees for the 2023 financial year.

These fee changes will come into effect on 1 July 2022.

FY23 annual listing fees will be calculated as at 31 May 2022 and will apply from 1 July 2022. ASX will issue the annual listing fee invoices in the first week of July 2022.

Initial listing fees will change from 1 January 2023.

The new fee schedules will be made available on the listing fees page of the ASX website from 1 July 2022 (Link). Until that time, a copy of the new fee schedules can be viewed using this link: Link.

For more information, please contact any member of the Sierra Legal team, whose contact details can be found here - Link.

On 3 March 2022, ASIC granted conditional relief to allow additional time for certain companies and registered schemes to hold virtual-only meetings.

A virtual-only meeting is a meeting that is held entirely using virtual meeting technology and this is the only way to participate in the meeting.

Under ASIC Corporations (Virtual-only Meetings) Instrument 2022/129, all unlisted companies (public and proprietary) are able to hold virtual-only meetings until 30 June 2022, even where this is not expressly required or permitted under the entity’s constitution. Under this instrument, listed companies and listed and unlisted registered schemes were able to hold virtual-only meetings until 31 May 2022, even where this was not expressly required or permitted under their respective constitutions.

Before an unlisted public or proprietary company relies on the relief provided by ASIC, the directors of the company must pass a resolution that it would be unreasonable for the company to hold a meeting of its members wholly or partially at one or more physical venues, due to the impact of the COVID-19 pandemic.

Permanent amendments to the Corporations Act 2001 (Cth) have already been made, such that (with effect from 1 April 2022) companies and registered schemes can hold virtual-only meetings, but only if this is expressly required or permitted by the entity’s constitution. For registered schemes, the provisions of the scheme’s constitution that require or permit virtual-only meetings must have been included in the constitution either at the time the scheme was established, or by special resolution of scheme members.

From 1 April 2022, companies and registered schemes can also hold hybrid meetings. At a hybrid meeting there is also one or more physical places at which the meeting is held, and so members can choose to attend in person or participate remotely via virtual technology.

For more information, please contact any member of the Sierra Legal team, whose contact details can be found here.

When did you start at Sierra Legal?

In December 2021.

What were you doing before Sierra Legal?

I have been working in the non-profit sector in youth development across Africa for the past 8 years and still work in that sector one day a week.  I now run programmes in South Africa for budding entrepreneurs, teaching our youth how to start and run their own successful micro-businesses.  With 75% youth unemployment in South Africa, it is critical that we equip the youth with the skills to generate their own income.

What do you do with your time when you aren’t advising on M&A deals and reviewing contracts?

I recently moved to Cape Town in South Africa (previously I was in Johannesburg for eight years) and so I love the mountains and the hiking I’m able to do here.  I have Table Mountain literally on my back doorstep, so I’m very blessed.  My number one favourite pastime though is spending time in Kruger National Park, viewing Africa’s amazing wildlife.

What was your first job?

I started my working career as a police officer in South Australia at the age of 18 years.  Talk about being forced to grow up in a hurry! It’s not an easy job on so many levels and I think the most important thing is learning how to cope (in a healthy way) with the things you see and must deal with daily.  Sadly, I lost several friends to suicide who just couldn’t cope with the pressure.  I think the psychological support that police officers get these days is much better than when I was a police officer many years ago.  In fact, we had no support – you just had to ‘get on with it’.

What was the first thing you bought with your own money?

A Nikon SLR camera.  I have always had a passion for photography and saved up to get a good camera and lenses.  This was back in the ‘old days’ of film. I had a darkroom at home (aka the laundry with black plastic over the windows) where I used to do all my own film processing and printing.  I loved it!  Thirty years later, photography is still a passion of mine although the format has changed to digital which of course makes it much easier for the average person to be a ‘good’ photographer.  Now that I’m living in South Africa, my favourite photographic subjects are the wildlife in Kruger National Park.

What was the last book you read?

Simon Sinek’s “Start with Why”.  The book looks at what separates great companies and great leaders from the rest and why some people and organisations are more inventive, pioneering, and successful than others. I love Simon Sinek, particularly his unconventional and innovative views on business and leadership.  He is the eternal optimist and has deep compassion for the human race and our ability, through working together, to change our world for the better.  Check out his podcast, A Bit of Optimism – it’s brilliant!

Favourite place?

Having lived in South Africa and worked across Africa for the past 8 years, I still think Australia is the best country in the world and it’s still my ‘home’ and favourite place.  A very close second is where I am living now, in Cape Town.  It has so much to offer, from the sea to the mountains, and reminds me so much of Melbourne. I love living here.

Favourite food?

That’s a tough one because I’m such a ‘foodie’. I love good quality, fresh, flavoursome, healthy food.  I’m known as the ‘Salad Queen’ and love making interesting salads and combining different flavours together. I know coffee is not a food but it’s my number one priority when I wake up.

Least favourite food?  

Peas!  I have hated them ever since I was a child.  Although I love snow peas and snap peas – go figure.  So, I guess it’s mushy peas / frozen peas that I dislike intensely.

Best advice you have received?

I try to live by this quote: “I've learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.” (Maya Angelou).  

I love people and have a genuine interest in people and what makes them tick.  Africa has afforded me the opportunity to work with past African Presidents, highly educated professionals, illiterate rural workers and with people who live in shacks made of pieces of scrap metal in townships.  I treat everyone the same - with respect, compassion and with an ear to listen and learn.  I have found that every single one of us want the same thing – to be seen, to be heard and to feel that what we do matters.

The removal of the following ASIC fees was announced in the 2022 Federal Budget as part of the Modernising Business Registers (MBR) program:

• ASIC company annual late review fees. This is a welcome move, particularly for small companies, which are more likely to incur these fees due to oversight.  Late review fees may also act as a disincentive for companies (particularly small ones), to update their details on the ASIC database if they miss a lodgement deadline, which makes the database prone to being inaccurate and out of date, and therefore less useful.
• ASIC search fees.  The abolition of fees payable by the public to search the ASIC database for information about companies (for example, registration status, registered office address, names of directors and shareholdings) will align Australia with other countries such as the US, UK and New Zealand, where (unlike the current position in Australia) a lot of information about a company can be obtained by anyone from Government databases for free. However, the scrapping of search fees may not good news for third party providers of company search services, who may lose some business.
• Some “ad hoc” company lodgement fees.  The Budget papers did not specify which ones are to be scrapped, but evidently some lodgement fees will continue to apply.

The abolition of the above fees is scheduled to take effect from September 2023, coinciding with the new Australian Business Registry Services (ABRS) platform becoming operational.  Established as part of the MBR program, the ABRS will result in the consolidation of more than 30 ASIC registers and the Australian Business Register (ABR) into one place.

The Budget papers say that the Government will forgo revenue of $64.9 million over 3 years from 2023-24 to streamline fees associated with Australia’s Business Registers, as companies are migrated to the new ABRS platform.

What?

A director identification number (Director ID) is a unique 15-digit number that identifies an individual as a director of an Australian company, registered Australian body or Australian registered foreign company.

All directors need to apply for their own Director ID and they will keep it forever even if they:

• change companies;
• stop being a director;
• change their name; or
• move interstate or overseas.

Why?

The requirement for Director IDs was introduced by the Australian government to:

• prevent the use of false or fraudulent director identities;
• make it easier for external administrators and regulators to trace directors’ relationships with companies over time; and
• identify and eliminate director involvement in unlawful activity, such as illegal phoenix activity (which is where a company is liquidated, wound up or abandoned to avoid paying its debts and then a new company is started to continue the same business activities without the debt, leaving employees and suppliers unpaid).

Who?

You need a Director ID if you are a director of a:

• company;
• Aboriginal and Torres Strait Islander corporation;
• corporate trustee, for example, of a self-managed super fund;
• charity or not-for-profit organisation that is a company or Aboriginal and Torres Strait Islander corporation;
• registered Australian body, for example, an incorporated association that is registered with the Australian Securities and Investments Commission (ASIC) and trades outside the state or territory in which it is incorporated; or
• foreign company registered with ASIC and carrying on business in Australia (regardless of where you live).

You do not need a Director ID if you are:

• a company secretary but not a director;
• acting as an external administrator of a company;
• running a business as a sole trader or partnership;
• referred to as a ‘director’ in your job title but have not been appointed as a director under the Corporations Act 2001 (Cth) (Corporations Act) or the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act);
• a director of a registered charity with an organisation type that is not registered with ASIC or the Office of the Registrar of Indigenous Corporations to operate throughout Australia; or
• an officer of an unincorporated association, cooperative or incorporated association established under state or territory legislation, unless the organisation is also a registered Australian body.

When?

You can apply for a Director ID now.

If you plan to become a director, you can apply for a Director ID before you are appointed as a director.

For directors under the Corporations Act

When you are required to apply for a Director ID depends on the date you become a director, as follows:

For directors under the CATSI Act

When you are required to apply for a Director ID depends on the date you become a director, as follows:

Criminal offence

ASIC is responsible for enforcing Director ID offences set out in the Corporations Act.  It is a criminal offence if you do not apply on time.

ASIC’s enforcement role covers the following Director ID offences under the Corporations Act:

How?

The Australian Business Registry Services (ABRS) is responsible for administering the Director ID initiative.  The ABRS was established to streamline how people register, view and maintain their business information with the Australian government.

It is free to apply for a Director ID from ABRS (https://www.abrs.gov.au/director-identification-number/apply-director-identification-number).

The following are the various Director ID application options:

For more information, please contact any member of the Sierra Legal team, whose contact details can be found here.

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Engaging an adviser, such as a lawyer, accountant, valuer, mergers and acquisitions (M&A) / corporate adviser or business broker can be a daunting process.  In any given field, there are many advisers and service firms in the market, and it can be difficult to know the best way to find and engage the right one for you – what should you look out for?

This blog sets out some tips for engaging an adviser, which are based on our experience in building good long term working relationships with our clients. As a specialist corporate and commercial law firm, we are not just familiar with the engagement process from the adviser’s standpoint.  We have also assisted clients in engaging other advisers.  

Tip 1:  Experience - find an adviser that has experience and specialises in the things you need

Ideally, find an adviser that specialises in the areas that are important to you.

For example, when it comes to lawyers, there are many areas of law and subsets of law (such as corporate and commercial law, property law, employment law, intellectual property law, family law and dispute resolution). A lawyer that specialises in a particular area:

• will be up to date on any changes to the law in that area;
• are more likely to be doing legal work in that area on a daily basis, and will therefore have considerable experience and expertise in handling similar matters; and
• can identify any legal issues quickly and expertly.

Similar considerations apply to other professional advisers, such as accountants.

It may also be helpful if the adviser has experience relevant to your industry and in dealing with businesses of the same or similar size as yours.  That could be of particular importance when, say appointing an M&A adviser to advise you in relation to the sale of your business, or a valuer to value a business.

You should also ensure that the adviser holds all necessary licences and other authorisations to provide the services you need.  While it may be obvious that your lawyer needs to hold an appropriate practising certificate, it may be less known that a corporate advisory firm needs to hold an Australian financial services licence (AFSL) to provide advice and services in connection with a sale or other dealing in shares and other financial products.  A business broker may need to hold an estate agent’s licence issued by the relevant state authority to sell your business.

It is worth doing your research and checking out an adviser’s website and social media to determine the experience and expertise that the adviser has in a particular area.  A recommendation or referral from a colleague, another adviser or trusted contact can also be a useful way of finding an adviser that meets your needs.

Tip 2:  Scope of Work

Following initial discussions and prior to engaging an adviser, ensure that the scope of work for the services you need is clear and you are also clear on any carve-outs, exclusions or assumptions as this will ultimately affect the fees that will be charged. 

For example, if you engage a law firm to prepare a business sale contract for you, is the quote just for the initial draft of the document or does it include further drafts following your comments and questions?  Does the quote include assistance with completion/settlement?  Does the scope of work include assistance with ancillary documents as part of the transaction?

If in doubt, ask the adviser to clarify the scope of work with you.

Tip 3:  Fees

Professionals such as lawyers and accountants typically charge fees on an hourly basis - although some may cap fees or charge fixed fees for particular work. 

Capped or fixed fees for a particular scope of work provide some certainty as to the invoice you expect to receive at the end of the matter.  If an adviser provides a fixed fee, as noted above in Tip 2, ensure that you understand the scope of work for that fixed fee as work outside the agreed scope may be charged at the adviser’s standard hourly rates.

For large matters, it is often a good idea to obtain regular updates on the fees incurred to date so that you can keep track of the work that has been done and the fees incurred.

Some advisers, such as M&A advisers, may charge break fees if the client terminates their engagement before the transaction to which the engagement relates proceeds (or if it does not proceed), or may be entitled to their fee if the transaction subsequently proceeds.  It is important that you understand these fees, and the circumstances in which you could be liable to pay them.

Tip 4:  Obtain multiple quotes

It can be a good idea to obtain multiple quotes for the work required.  However, if you do so, you will need to consider those quotes in detail as it is often not a matter of comparing ‘apples with apples’.  It is important to assess the scope of work, charge-out rates for future work, whether the fees are an estimate or a fixed fee, any assumptions or exclusions, and the relative experience of the respective advisers. 

For some advisers such as lawyers, keep in mind that a cheaper upfront price will not necessarily mean a cheaper price overall, particularly if the initial scope of work is limited, and the matter becomes more protracted.

Also, it is worth asking the adviser to clarify who in their firm will be engaged in your matter and their hourly rates.  To keep fees low, some professional services firms (such as legal and accounting firms) often use junior staff to produce the work, which may not be the same quality as a practitioner with more experience.

Tip 5:  Communication and rapport

With everything else being equal (i.e., experience, scope of work, fees, etc), you should consider whether you have a good rapport with the adviser you are engaging (and whether that adviser is a good communicator, both with advice and returning your calls and queries in a satisfactory and timely fashion).

As a business owner, it is important to surround yourself with first-class experts you can trust - from legal advice to accounting and financial strategy.

Communication, trust and respect are important for building a long term adviser-client relationship, and for ensuring that you are kept up to date as your matter progresses.

Tip 6:  When to appoint an adviser

In some cases, it may be obvious when to engage an adviser.  For instance, you would appoint an M&A adviser or business broker before you offered your business for sale.

However, from experience, when it comes to lawyers, we know many people believe that it will be cheaper if they are engaged at the last minute of a transaction.  Nonetheless, it can often be more efficient, and costs can be saved, if lawyers are involved from the commencement of the matter - they can then be up-to-speed on the entire transaction from the start, and can ensure that a matter is correctly structured (which could save costs in the long run if parts of a transaction need to be unwound due to lack of advice).

About Sierra Legal

Sierra Legal is a boutique corporate and commercial law firm that specialises in assisting their clients with buying and selling businesses, corporate structuring, capital raisings and general corporate/commercial matters.  Sierra Legal has lawyers in Melbourne, Brisbane and the Gold Coast. All of our lawyers are at Director or Special Counsel level with at least 13 years’ experience in medium to large local and international law firms.

How does Sierra Legal charge for work?

We work with our clients to develop fee arrangements that are the most appropriate for each matter.  Our fees are structured in flexible and innovative ways, including fixed or capped fees, blended rates, and, for some transactions, success-based fees. 

Our pricing is transparent, and we always provide our clients with certainty on the legal costs related to their matters.  The vast majority of our work is performed on a fixed or capped fee basis, making it easy for you to budget for legal costs.

For ongoing legal work, clients can also obtain greater price certainty by selecting a Sierra Legal Monthly Plan.  Please see Sierra Monthly Plans.

Other legal specialties and advisers

While Sierra Legal specialises in corporate/commercial legal matters, we have contacts at a number of other firms with expertise in other areas of law, such as property law, dispute resolution and employment law.  We may also be able to put you in contact with other advisers, and assist you in the engagement process (e.g., reviewing their terms of engagement).  We are always happy to have a chat, so please do not hesitate to contact us should you not know the type of lawyer required for a matter, or you need a recommendation for an area of law outside of our specialisation or for another type of adviser.

You’ve probably heard it before: “We just need you to sign our standard NDA first. We’ll send it through. You just need to sign and send it back.”

Is it OK to sign the other party’s standard non-disclosure agreement (NDA) (also commonly known as a ‘confidentiality agreement’)? Will your company’s standard NDA be the right fit for the discussions you are about to have? Maybe, but it’s probably best to understand the NDA and whether it is suitable for the circumstances first.

Contrary to what some people may think, not all NDAs are the same. Here are some issues to think about:

What ‘Confidential Information’ will be covered?

The obligations under a typical NDA are based around protecting what is defined as ‘Confidential Information’. It is common to see very broad definitions of ‘Confidential Information’, so that the agreement covers essentially everything provided by one party to the other, or everything about one party that is known to the other party, except for information in the public domain. This may be appropriate, but you need to be aware that it may mean that a very wide range of information is covered by the agreement, so it may be very onerous or simply impractical to fully comply.

If there is only a small range of information that really needs to be protected, it may be best to define ‘Confidential Information’ much more specifically.

‘Approved Purpose’

It is usual for a NDA to set out an ‘Approved Purpose’ or ‘Permitted Purpose’, which is the only purpose for which the receiving party is permitted to use the Confidential Information. It is important to get this right.

Responsibility for accuracy of information

It is common for standard NDAs to include a clause that seeks to exclude the disclosing party’s responsibility or liability for the accuracy or completeness of the information disclosed. Sometimes we see the opposite: a clause providing that the disclosing party guarantees the accuracy and completeness of the information.

Care and consideration should be given to these clauses before agreeing to them. What if the whole purpose of your dealings with the other party is that they are giving you materials that you should be entitled to rely on? Or the opposite, are you doing the other party a favour and want to minimise your liability in relation to the information, but you have just signed up to an agreement with a specific warranty of accuracy and completeness?

Who can be given the information?

Most of the time an NDA will be entered with a company. But when the information is disclosed, which individuals within the company receiving the information should be allowed to access it?

It is usual for an NDA to provide, at a minimum, that the information can only be shared within the company with individuals who have a need to know the information in relation to the Approved Purpose and that the company is responsible for ensuring that the individuals comply with the terms of the NDA. This may be appropriate, but you may also want to consider a more restrictive approach if you are the “disclosing party”. For example, this could include an obligation on the receiving party to ensure that all individuals to whom it provides access to the confidential information sign a personal confidentiality undertaking which is provided to the disclosing party.

Putting the right templates in place

Your organisation can more efficiently enter into suitable NDAs by having the right templates in place that take account of these and other issues in accordance with your organisation’s circumstances and needs.

Please feel free to contact any member of the Sierra Legal team to discuss how we can assist.

Your decision to buy a business and your negotiations with the seller over the price and other terms and conditions of the purchase will be influenced by information provided by the seller.  For example, the seller is likely to provide you with financial statements of the business.  The seller may also be willing to share internal forecasts and budgets.  Other information and documents relevant to the business may be disclosed by the seller as part of your and your advisers’ due diligence investigations of the financial, operational and legal aspects of the business. 

It is, of course, prudent for the purchaser to check the information the seller provides for accuracy and (in relation to any forecasts and budgets provided by the seller) reasonableness.  For instance, this could be done by a review or audit of the financial statements (where they are unaudited special purpose accounts) and, if possible, independent verification by searching public records and registers.  However, budgetary and time constraints and the nature of much of the information provided by the seller will rarely allow you to undertake a complete investigation of all aspects of the target business, and to independently verify all information provided by the seller. 

This is why it is common for the purchaser to require the seller to provide warranties about the business in the contract for the sale and purchase of the business.  The warranties will generally be about specific aspects of the business and may be used to confirm information provided by the seller.  If the warranties are later proved to be incorrect, or misleading (depending on the wording of the warranty provisions in the contract), the purchaser will be entitled to recover any resulting loss from the seller.

The following are some key points about seller’s warranties from the purchaser’s perspective:

Warranty limitations: The seller is likely to want to limit their exposure under the warranties.  One common limitation is to seek to exclude warranty claims based on information or matters which the seller disclosed to the purchaser before the sale and purchase contract was signed (the principle being that if the seller has disclosed a risk to you before you legally committed to the purchase, you should not be able to sue them for any loss if that risk later eventuates). 

Although that is not generally unreasonable, if you are prepared to accept a limitation based on seller disclosure, the extent of the limitation should be clearly stated in the contract.  For example, you may want to stipulate that only full and fair disclosure of a matter which may give rise to a future warranty claim, or only full and fair disclosure against specified warranties (in a disclosure letter or similar document given by the seller before the contract is signed), will limit your right to claim under the warranties.  Otherwise, the seller may argue that a general and non-specific disclosure of information during due diligence (which may have been insufficient to enable you to identify a risk of a warranty breach) will preclude you from making a warranty claim afterwards. 

Other common limitations include a monetary cap on the seller’s liability for warranty claims and a time limit within which the purchaser is allowed to bring a claim for breach of warranty.

Co-warrantors: If the seller is a company, the sale proceeds may, a short time after the sale of the business completes/settles, be distributed to the company’s shareholders, leaving no more than a shell company with no, or no substantial assets.  That would make a later warranty claim by the purchaser against the seller company fruitless.  Therefore, you may want someone of some financial substance, in addition to the seller company, to give the warranties under the sale contract.  That will often mean the directors of the seller company being required to give warranties jointly and severally with the company.

Hold-back of funds/escrow: Even so, there may be no opportunity for the purchaser to assess the financial standing of the directors or other co-warrantors when entering into the sale contract, in particular, their financial standing in the future when a warranty claim may need to be made.  To ensure that there will be some funds readily available to meet a claim later on, you may try to negotiate for some of the sale price to be held back at completion/settlement, or placed in escrow (i.e., held by a third party stakeholder or your lawyer in trust), for part or all of the warranty period.

If you have any questions on seller warranties, or any other legal aspect of buying or selling a business, please do not hesitate to get in touch with one of the Sierra Legal team.

Unfair Contract Terms regime

The Unfair Contract Terms regime in the Competition and Consumer Act applies to "standard form contracts" which are either "consumer contracts" or "small business contracts".  If a court or tribunal finds that a term in these types of contracts is ‘unfair’, the term will be void (i.e. the term will not be legally binding on the parties).  The rest of the contract can continue to bind the parties to the extent it is capable of operating without the unfair term.  For further background on the unfair contract terms generally, you can read our previous article on this topic.

Recent updates

Updates/consultations in relation to the Unfair Contract Terms regime include:

• the extension of the Unfair Contract Terms regime (since April 2021) to certain types of insurance contracts (including common forms of insurance contracts such as car insurance, house and contents insurance, travel insurance and life insurance); and
• the ACCC consultation on enhancing the Unfair Contract Terms regime further to potentially include making unfair contract terms illegal and attaching penalties, strengthening powers of regulators, and changing the threshold for what constitutes a small business.  Draft legislation on the potential updates has yet to be released but you can view the responses submitted in connection with the consultation and further updates via this link: https://consult.treasury.gov.au/consumer-and-corporations-policy-division/enhancements-to-unfair-contract-term-protections/

Fuji Xerox case

We previously wrote (October 2020 Article) about the ACCC’s legal action in the Federal Court against Fuji Xerox Australia, where the ACCC alleged that Fuji Xerox’s template/standard form contracts included contract terms (including automatic renewal terms, excessive exit fees and unilateral prices increase) that were unfair under the Unfair Contract Terms regime in the Competition and Consumer Act.

Fuji Xerox applied for a summary dismissal of the ACCC’s case on the basis that the contracts in question were merely template contracts and the ACCC’s case did not identify or focus on any actual contract between Fuji Xerox and a particular customer.

In March 2021, the Federal Court of Australia rejected Fuji Xerox’s application for summary dismissal.  Although a final decision has not yet been made on whether the terms in Fuji Xerox’s template contracts are actually unfair under the Unfair Contract Terms regime, the activity involving the Fuji Xerox case (as well as the ACCC consultation) is a good reminder to ensure any standard form or template contracts are regularly reviewed to ensure that they do not contain any terms that could be considered to be unfair under Unfair Contract Terms regime. 

If you have any questions on unfair contract terms and how they apply to your business please get in touch with one of the Sierra Legal team.

Congratulations to Kenneth Gitahi on his promotion to Director and Samantha Khoo and Troy Mossley on their promotions to Special Counsel.

Ken, Sam and Troy all specialise in mergers & acquisitions, shareholder arrangements, IPOs and other capital raisings, private equity investments, and general corporate and commercial advice and have been invaluable members of the Sierra Legal team!

Joint ventures/business arrangements are commonly structured as proprietary limited companies with 2 or more shareholders.  While it may not seem essential at the start of the business relationship, having an agreement between the shareholders has a number of key benefits including:

• having a clear agreement on the rules that will govern the company/business and the shareholders’ relationship with each other; and
• ensuring that the rules about potentially difficult or sensitive matters including transfers of shares, dispute resolution and exit events are put in writing while the relationship between shareholders is amicable – this may help to avoid difficult, emotional and stressful disagreements in the future.

If you require a shareholders’ agreement, it is important that it is tailored to the shareholders, to the business, and to the future plans of the company.  The following are a few key issues to consider prior to having a shareholders agreement prepared: 

Structure of the agreement: Consideration should be given to the short to mid-term plans of the company as this may impact the terms and structure of the agreement.  For example, if it is expected that the company will look to raise funds by issuing ordinary or preference shares to parties other than the existing shareholders, the agreement should be appropriately drafted so that amendments are not required at the time of issuing those shares.   

Decision making: How will decisions of the company and the business be made?  For example:

• Will certain day-to-day decision-making powers be delegated to a CEO or Managing Director?
• What matters can be decided by the directors (and will such decisions be by majority vote (50%), special majority vote (generally 75%) or unanimous vote (100%))? 
• What matters will be reserved as decisions of the shareholders (and will such decisions be by majority vote (50%), special majority vote (generally 75%) or unanimous vote (100%))?  

Funding and share issues:

• Shareholders will need to consider how the company will be funded and whether it will be by way of debt (i.e. loans from shareholders or external financiers), equity or a combination of both.
• If additional funding is required, how will this be structured – i.e. will there be an obligation on shareholders to contribute in their respective proportions?

Transfer of shares:

• The agreement should typically include a pre-emptive rights process under which a shareholder wishing to transfer any of its shares must first offer their shares to the other shareholders (before offering them to third parties). 

• Shareholders should consider whether there should be provisions that automatically trigger a forced sale of a shareholder's shares, for example, where a shareholder:
• dies, becomes permanently incapacitated or of unsound mind;
• becomes insolvent;
• has not remedied a breach of the shareholders agreement; or
• who is also an employee, ceases to be an employee of the company. 
• Shareholders should consider how the rights of pre-emption and forced sale trigger events impact the process for transferring shares – are longer timeframes or different mechanisms required to allow existing shareholders to acquire the shares being transferred so that the existing shareholders can maintain control of the company?
• Do there need to be tag along and/or drag along rights (i.e. the ability for minority shareholders to tag along and sell their shares if a majority shareholders sells its shares to a third party, or the ability for a majority shareholder to drag along the minority shareholders by requiring them to sell their shares to a third party along with the majority shareholder)?

Employment arrangements:   

• Will any of the shareholders also be employees of the company and be required to sign up to formal executive services agreements or employment agreements, and what are the terms of those arrangements?
• Consideration should also be given to the manner in which the company (or its board) can terminate the employment of any shareholders (or their associated persons) who are also employees, and whether this should trigger a forced sale of any shares held by the employee shareholder.  

Restraints:  Restraints are provisions that protects the business if any shareholder leaves. Care must be taken to ensure these provisions are not drafted in a way that may result in them being unenforceable or contrary to law (e.g. under the cartel/exclusionary provisions in the Competition and Consumer Act 2010 (Cth)).

Resolution of deadlocks:

• Consider whether a resolution process to resolve deadlocks at board/shareholder meetings is required (e.g. where a significant decision is raised but is not passed because there is no unanimous vote or special majority vote, depending on which voting threshold applies).
• Deadlock resolution provisions could also provide that where a certain number of deadlocks occur (e.g. 3 times in 3 months), an agreed deadlock resolution process should be followed which may include mediation, a forced sale or exit, a pre-emptive rights offer, or a winding up of the company. 

If you have any questions on shareholders agreement or need a shareholders agreement prepared for your company, please do not hesitate to get in touch with one of the Sierra Legal team.

If you’re not in the business of supplying to retail consumers, you could be excused for thinking that the consumer guarantees under the Australian Consumer Law (ACL) were not something you needed to worry about.

However, given the definition of “consumer” in the ACL, the consumer guarantees already apply to a number of business to business transactions (in addition to business to retail consumer transactions), and from 1 July 2021 they will apply to a lot more.

The definition of “consumer” already applies to supplies (including to business customers) of goods and services:

• of a kind ordinarily acquired for personal, domestic or household use of consumption; or
• for a price of $40,000 or less,

but from 1 July 2021 the $40,000 threshold will increase to $100,000.

This means that any business that supplies goods or services to another business where the value of those goods or services is less than $100,000 will need to comply with the consumer guarantee regime in the ACL.

(There is no change to the exclusions from this regime, including for goods purchased for re-resupply or use in production or manufacture.)

There are 9 consumer guarantees that apply to goods and 3 consumer guarantees that apply to services. These include, for example: guarantees for goods relating to acceptable quality, fitness for purpose and compliance with express warranties and guarantees for services relating to fitness for purpose and being performed with due care and skill.

Among other available remedies, “consumers” (including business customers) can potentially claim uncapped compensation from a supplier (including for consequential losses) if they suffer loss or damage as a result of breach of a consumer guarantee (for example, for business losses resulting from goods or services that are found not to have met a guarantee relating to fitness for purpose.)

In many circumstances, however, a limitation of liability clause that meets the very specific requirements of the Australian Consumer Law can be effective.

Sierra Legal can assist by reviewing your standard terms to ensure that an appropriate limitation of liability clause is in place and advising on the consumer guarantees and other relevant obligations under the Australian Consumer Law.

It is now six months since Senior Consultant, Michael Abrahams, joined us in a part time capacity (while continuing his other role as General Counsel, Company Secretary & Integrity Officer at Essendon Football Club).

We sat down with Michael to talk about his observations on returning to private practice after almost 15 years as an in-house lawyer.

What are the key differences between working in-house and advising clients in private practice?

As an in-house lawyer, you have a range of internal clients, but you are a part of the organisation itself, so you develop a deep understanding of the organisation, its priorities and how it thinks and you also have an opportunity to influence and improve the organisation from the inside.

Private practice lawyers aren’t usually embedded in the client’s business in the same way, but you do get the opportunity to work with a wider range of clients in different industries and have the benefit of working alongside other senior lawyers (which you don’t necessarily get to do in-house).

Based on your experience, are there opportunities for businesses and their lawyers to get more out of the relationship by thinking in different ways?

Absolutely! In my experience, businesses often look at contracts and other legal matters on an individual basis and only involve their lawyers when more significant matters come to their attention.

Sometimes these matters take up a lot of legal resources and can arise when the client is already practically committed to the transaction (so are no longer in the best bargaining position).

Alongside this, the business will inevitably be entering a significant number of other contracts all the time (which may not be very formal or obvious, such as when buying on a supplier’s terms) and these might get no attention from a legal or risk perspective.

I think there is huge scope for businesses to address this by using the right external lawyers to help them identify their true key risks and create the systems, procedures and templates to address them in a systematic and efficient way.  Technology can play an important role in this and it’s exciting that at Sierra we are able to offer an extra element to this service through our contract automation service, Arreis Automation.

Personally, moving back into a private practice as a senior lawyer, it’s great to have the opportunity to take what I have learned in-house and make a difference for a range of clients and not just my one employer.

Sierra Legal is pleased to announce that Davide Cavalleri has joined the firm as Special Counsel.

Davide is a highly experienced corporate and commercial lawyer who specialises in mergers and acquisitions, corporate advisory and general commercial law.

As part of Davide joining the team, we ask him all the tough questions…

What were you doing before Sierra Legal? I was a special counsel in the corporate/commercial team in a mid-tier firm.  Prior to that, I was a principal in a smaller boutique commercial law firm in Melbourne.  I also owned and ran a small manufacturing business for a time in between, which got me out of the legal ivory tower – it helped me appreciate a little what some of our business clients have to deal with on a daily basis.

What do you do with your time when you aren’t advising on M&A deals and reviewing contracts? I took up running about 12 years ago.  I really enjoy it, both to keep fit and as a form of stress release.  I also like pottering about the garden, although that can be a challenge with Melbourne’s weather.

What was your first job? A sales clerk in an electrical components wholesaler.  After a while, I knew the names and specifications of a vast quantity of stock items, without having a clue as to what most of them were actually used for.

What was the last book you read? “A Promised Land”, Barack Obama’s memoir.

Favourite place? Port Douglas, in far north Queensland.  As a Melbournian, I suspect I’m not alone in saying that.  There are plenty of ex-southerners living up there!

Favourite food? I confess I have a soft spot for a good pizza.  I limit my intake these days though, as it has to be followed up by a very long run to burn off the calories!

Least favourite food? Dairy and cheese (although I make an exception where it’s a pizza topping).

If you were stranded on a desert island, what 3 things would you want with you? A satellite phone and 2 fully charged backup batteries, so I can call for help and be rescued.

Best advice you have received? “To live in the moment”.  It’s easier said than done, though.

Welcome to the team Davide!

Tip 1:  Know what you are buying – shares or assets

Most people operate their business through a company.  This means that a buyer can either buy:

• the shares held by the shareholders in the company; or
• the assets used by the company to operate the business. 

However, if the business is operated by a sole proprietor or through a trust, then the buyer may be limited to buying just the assets.

The difference between a share purchase transaction and an asset purchase transaction is that:

• a share purchase transaction involves the buyer purchasing all of the shares in the company that operates the business.  When the buyer purchases all of those shares, the buyer becomes the shareholder or owner of the company - including everything that the company owns (i.e. plant and equipment, land and buildings, goodwill, intellectual property and rights and benefits under customer contracts).  Importantly, owning the company also typically means that you inherit any debts or liabilities of the company (which is factored into the purchase price).
• an asset purchase transaction involves buying some or all of the assets that the company uses to operates its business.  These assets may include contracts, plant and equipment, land and buildings, goodwill and intellectual property.  In an asset purchase transaction, the buyer may prefer to purchase just some of the assets that are used to operate the relevant business and leave behind other assets and any of the debts or liabilities with the company.   

The decision on whether to buy shares or assets may become clearer after undertaking due diligence on the target business. There may also be tax reasons why a buyer may to prefer to purchase shares over assets or vice versa, and a buyer should speak to its accountant about this at the outset.

Tip 2:  Negotiate an exclusivity period with the seller

If possible, a buyer should try to negotiate for an exclusivity period during which the buyer has the sole right to conduct due diligence on the target company and business.  This is intended to prevent the seller from trying to solicit other offers from (or negotiate with) other prospective buyers during the exclusivity period.   

Tip 3:  Understand your funding options

Before starting the acquisition process, a buyer should consider how it will fund the proposed acquisition (cash, debt finance from a financial institution, or possibly vendor finance).

If a buyer needs to get a loan to fund the acquisition, the lender may wish to take security over the shares or assets of the target business and review the due diligence on the target business. 

Tip 4:  Undertake due diligence

Due diligence is essentially an investigation into (and an appraisal of) the target business/company, to assess its assets, liabilities and commercial potential. 

From a legal perspective, this would include things like reviewing the business’ material contracts, funding and borrowing arrangements, any current litigation, records of any employees and their entitlements, and conducting searches on any land or buildings owned or occupied by the target business.

A buyer will usually also want to do financial, commercial and possibly tax due diligence on the target company or business (and should speak to their accountant about this). 

Due diligence is important because:

• a buyer should ensure that it knows what it is buying so that it can better manage its risk associated with the purchase of the target business; and
• it will assist a buyer to negotiate the terms of the purchase.  For example, legal due diligence may reveal that there are certain risks in the target business which the buyer may then want to protect against.    

The level of due diligence on the target business will depend on a number of factors including the value of the acquisition and the buyer’s experience in the relevant industry.  Please see our recent article for top tips when conducting due diligence.

Tip 5:  Understand what protections you may need in the documents as a result of due diligence

If the buyer still wants to proceed with the purchase after conducting initial due diligence, the next step is to prepare, negotiate and enter into definitive transaction documents to formalise the proposed sale and purchase of the target.  Sometimes a term sheet or heads of agreement is entered into first for the parties to agree on the key terms that will appear in the definitive transaction documents.

A buyer will need to understand any material issues arising from due diligence to translate those issues into protections sought by the buyer in the sale and purchase agreement.  Examples of buyer protections that are often included in a sale and purchase agreement include:

• having certain conditions precedent that must be satisfied before settlement or completion of the transaction;
• including provisions that require part of the purchase price to be held back or retained until a specified action or result is achieved; and
• including indemnities or warranties from the seller to address specific risks.

If you have any questions on buying a business, undertaking legal due diligence or would like assistance with conducting legal due diligence on a target business, please do not hesitate to get in touch with one of the Sierra Legal team.

Some interesting commentary and insights on mid-market M&A in Australia in 2021 in the latest Mergermarket publication.

We agree with the sentiments in the publication - despite interesting conditions in 2020, during the second half of the year we advised on a number of M&A/private equity transactions occurring across various industries.

The main drivers for these transactions seem to be: (i) owners of businesses that have solid fundamentals (despite current market conditions) seeing it as a good opportunity to exit their business (with buyers equally seeing it is a good opportunity to buy); (ii) competing businesses merging to achieve cost efficiencies and greater stability; and (iii) companies seeking private equity investment for stability and future growth.

If you have any questions on the sale of your business (or if you are a buyer, on buying a business), please get in touch with the Sierra Legal team.

Before buying a business, it is recommended that the buyer undertakes due diligence on the target business.  In conducting due diligence, a buyer should aim to know as much about the target business as it does about its own business. 

The following are some key tips to keep in mind when conducting due diligence on a target business:

• Negotiate an exclusivity period with the seller:  An exclusivity period will ensure that the buyer can devote time and resources to undertake due diligence as the only prospective buyer and without being concerned that the seller is, at the same time, trying to solicit other offers for the target business.
• Engage experienced advisers:  A buyer should engage advisers (such as lawyers, accountants and tax advisers) experienced in advising on M&A transactions to assist in conducting (and reporting on) due diligence on a target business.  Advisers experienced in M&A transactions and conducting due diligence will know what issues to focus on (or look out for) during the due diligence process.  
• Agree on the scope of the due diligence:  Before obtaining detailed information on the target business, the buyer and its advisers (legal and financial) should agree on the scope of the due diligence.  The scope of the due diligence review will depend on factors such as the nature of the business, the size and value of the business and the risk appetite of the buyer.  Often, materiality thresholds are adopted to enable the buyer’s due diligence team to focus (and report) only on matters that exceed the thresholds, making the review of the due diligence materials relevant and efficient.
• Obtain detailed information about the target company:  A buyer should request detailed information from the seller about the target business.  To assist with this, the buyer (or its advisers) should provide the seller with a detailed due diligence questionnaire/checklist that requests information (and copies of documents) about the target business. Ideally, the seller will respond to the due diligence questionnaire/checklist while at the same time collating the supporting documents in an online data room.  The materials in the data room should, as far as is possible, be arranged in folders (and sub-folders) that correspond to the structure of the due diligence checklist to make it easy to locate information in the data room and to make it easy to delineate the sections of the data room that each of the buyer’s experts will focus their review on.
• Conduct a detailed and targeted review:  Once the Seller has completed the questionnaire and uploaded documents into the data room, the buyer and its relevant advisers will review the completed questionnaire/checklist and material in the data room.  Typically, a due diligence review is divided into:
• Legal due diligence:  includes a review of the corporate structure and records of the target company, material contracts, results of searches of registered intellectual property, business names, registrations of personal property securities and other securities, and current proceedings, transfer of employees and their entitlements.
• Commercial due diligence:  includes a review of real property/premises, plant and equipment, stock and inventory, systems and processes, employees, customers, products and services, suppliers, assets, insurance, market trends and issues.
• Financial due diligence:  includes a review of financial performance, financial position, maintainable earnings, debtors, creditors, work in progress, salaries and wages, superannuation, finance facilities, guarantees and bonds, pre-payments, tax returns, liabilities, notices, disputes, penalties.
• Tax due diligence:  includes a review of tax returns, liabilities, notices, disputes, penalties, etc and the tax impact of the transaction (as structured) on the buyer; and
• Obtain formal due diligence reports:  Once the buyer’s advisers have completed their review of the due diligence materials, they should report to the buyer in writing on their findings.  Often, advisers may report to the buyer on an “exceptions basis” only (unless the buyer requires otherwise).  This means that the due diligence report would only mention issues identified from the due diligence exercise whose value or impact would be over a certain materiality threshold.  The recommendations will inform the buyer’s decision on what action(s) to take in relation to the material issues identified during due diligence. 
• Allow sufficient time:  The collation of relevant documents and information by the seller, and the review of those materials by the buyer, take time, so allow sufficient time for proper due diligence to be undertaken as part of the transaction timetable.
• Negotiate relevant protections in the transaction documents:  Following completion of the due diligence process (and provided the buyer wishes to proceed with the transaction), the next step is negotiating and entering into definitive transaction documents to formalise the proposed sale and purchase of the target company.  The material issues identified in the due diligence reports and the respective recommendations of the buyer’s advisers will frequently translate into protections sought by the buyer in the relevant transaction documents, which may include the completion of certain remedial actions as conditions precedent to completion; a pre or post-completion undertaking to take a specific action; an indemnity to protect the buyer from specific material risks; or additional warranties addressing specific or general areas of concern for the buyer.

If you have any questions on buying a business, undertaking legal due diligence or would like assistance with conducting legal due diligence on a target business, please do not hesitate to get in touch with one of the Sierra Legal team.

• Melbourne
• Unique and flexible work environment
• Relaxed, close-knit and supportive team
• Broad range of corporate and commercial work

Are you tired of working in a typical “ivory tower” law firm, or the constant pressure of personal fee budgets?  Do you want to be part of a dynamic and growing team with genuine flexibility around work location and hours? 

Sierra Legal is a boutique legal practice that was formed 10 years ago.  Our current clients, to name a few, include Bingo Industries, Bulla Dairy Foods, Chubb Insurance, Clark Rubber, Edison Growth Fund, Energy Power Systems Australia, Hisense, Medibank, Simoco Wireless Solutions, Straight Bat Private Equity and World Vision Australia.

We have offices in Melbourne and Brisbane, but when our lawyers are not out seeing clients, they are often working from home offices and communicating regularly with each other online.  All our lawyers have come from large firms (including Middletons/K&L Gates, McCullough Robertson, King Wood Mallesons and Clyde & Co) and share a common desire to practise law in a far more flexible workplace environment, but still being part of a friendly, supportive team that does interesting, high quality legal work.  Unlike most if not all other law firms, we do not have personal fee budgets, but are instead focused on the customer, by delivering top-quality and commercially focused legal services for our clients.

Another unique feature of Sierra Legal is its document automation service offering, Arreis Automation.  This involves us coding and hosting bespoke web apps for our clients, which enables them to automatically generate their own contracts and other documents themselves from Sierra Legal’s online software platform (see https://www.sierralegal.com.au/arreis).

Importantly, over the last 10 years, Sierra Legal has demonstrated an extraordinarily high retention rate with its team members, in that only 2 of our lawyers have left the business during that period!

We are looking for a talented Melbourne based corporate/commercial lawyer to join our growing team at Senior Associate or Special Counsel level, to work on a broad range of complex and interesting M&A, corporate and commercial matters. 

You will be working within a close-knit team of experienced commercial lawyers, principally in some or all of the following areas:

• Mergers and acquisitions
• Reverse listings, IPOs and public company takeovers
• Capital raisings and debt restructuring
• Commercial agreements
• General corporate legal advice
• Preparation and automation of template documents as part of Arreis Automation

We are seeking candidates who possess an outstanding analytical mind, strong interpersonal and communication skills, excellent drafting skills, attention to detail, personal integrity, self-motivation and the ability to work as part of a close-knit team. 

If you would like to be considered for this exciting and unique role, please email your CV in confidence to careers@sierralegal.com.au

Happy New Year!

We are excited to be back in 2021 to continue providing exceptional, commercially focused legal services to our clients in the following areas:

✔️️ M&A (including buying and selling companies and businesses).

✔️ Shareholder transactions (including shareholder agreements and joint ventures, private equity transactions and IPOs).

✔️ Corporate advisory (including Corporations Act and ASX Listing Rules advice).

✔️ Commercial law (including customer and supplier contracts, IT and IP licences, outsourcing contracts and finance arrangements).

If you are thinking about engaging in a corporate/commercial transaction in the next 12 – 18 months, please do not hesitate to get in touch with one of the Sierra Legal Team, as it is never too early to have an initial discussion.

For further information on us, our experience and some of the innovative products we offer, please also see:

📢 https://www.sierralegal.com.au/what-we-do and https://www.sierralegal.com.au/experience for further details on our legal services, flexible fee arrangements/products and our experience; and

📢https://www.sierralegal.com.au/arreis on our innovative legal automation platform, Arreis Automation.

We look forward to working with you in 2021!