The Consumer Data Right regime and Open Banking commenced in Australia in August 2019.

The Consumer Data Right regime is intended to, among other things, give consumers greater choice and control over how data about them held by businesses and service providers in various sectors is used and disclosed.  This, in turn, allows consumers to more easily compare and switch between products and services.  Banking is the first sector in Australia to be impacted by the Consumer Data Right.  The energy and telecommunications sectors are expected to follow next.

Some brief background - in August 2019, the Competition and Consumer Act 2010 (Cth) was amended to introduce a new Part IVD relating to the Consumer Data Right regime.  This introduced some new concepts such as CDR Data, CDR Consumer as well as various privacy safeguards that set out certain standards, rights and obligations in relation to collecting, using, disclosing and correcting CDR Data when there are one or more consumers.  Under the Consumer Data Right regime, consumers can be either entities or individuals and therefore, the privacy safeguards apply to a wider set of persons (and data) within the relevant sector, and they are generally stricter, than the Australian Privacy Principles.  Further background to the introduction of the Consumer Data Right regime can be read in our previous article - https://www.sierralegal.com.au/news/2019/9/3/consumer-data-right-update

Recent updates - in the latest instalment of CDR-related releases this year, the Office of the Australian Information Commissioner (OAIC) released for consultation earlier this month, draft Privacy Safeguard Guidelines for the Consumer Data Right regime (CDR Privacy Safeguard Guidelines).  The CDR Privacy Safeguard Guidelines will guide entities covered by the CDR regime on how to avoid acts or practices that may breach the privacy safeguards.

The privacy safeguards and the CDR Privacy Safeguard Guidelines will apply to entities who are authorised or required to collect, use or disclose CDR Data for which there is at least 1 consumer.  However, for some of these entities, there may be a requirement to comply with both the privacy safeguards and the Australian Privacy Principles.

For other entities that are not caught by the CDR regime but are already covered by the Australian Privacy Principles, those principles will continue to apply (i.e. the privacy safeguards and CDR Privacy Safeguard Guidelines only impact upon entities that will be authorised or required to collect, use or disclose data under the CDR regime).

There are 13 privacy safeguards and the draft CDR Privacy Safeguard Guidelines include a summary of how each privacy safeguard interacts with the Australian Privacy Principles.

The OAIC is currently consulting on the draft CDR Privacy Safeguard Guidelines and is taking written submissions on these guidelines until 20 November 2019.  The final CDR Privacy Safeguard Guidelines are expected to be published on 16 December 2019.

You can access further information on the draft CDR Privacy Safeguard Guidelines through this link: https://www.oaic.gov.au/updates/news-and-media/oaic-commences-consultation-on-draft-cdr-privacy-safeguard-guidelines/

For more information on the Consumer Data Right regime, please contact:

Samantha Khoo, Senior Associate, on M: +61 (0)422 190 433 or E: skhoo@sierralegal.com.au

Mike Jeffery, Director, on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

As part of the Dynamic Business “Let’s Talk” series, Sierra Legal Director Mike Jeffery shares his thoughts on “How you can successfully implement new tech”:

“For a business to successfully roll-out new technology (for internal use by the business), the utilisation of that technology (and ultimately, the success of that project) requires “buy-in” from staff.  Staff need to understand how the particular technology will improve processes within the business.  More importantly, staff need to appreciate how the technology will benefit them (e.g. saving them time, personally).  New technology that adds an extra layer of complexity for staff (no matter how beneficial to the business) is less likely to be widely adopted.

For customer facing technology, a similar philosophy applies. To achieve positive customer utilisation rates, simplicity and ease of use are critical. Customers take only seconds to judge new technology, so a slick and well-designed user interface is critical.”

Sierra Legal has recently launched its own tech - Arreis Automation.  See https://www.sierralegal.com.au/arreis for further details on how the Arreis Automation contract automation platform can benefit your business.

Read more of the Dynamic Business discussion here - https://dynamicbusiness.com.au/featured/lets-talk-new-tech.html

As part of the Dynamic Business “Let’s Talk” series, Sierra Legal Founder and Director Craig Sanford shares his thoughts on maintaining great work culture in a period of business growth - https://dynamicbusiness.com.au/featured/lets-talk-culture-2.html

Sierra Legal maintains a true “team” philosophy as part of our culture which promotes greater cohesion, efficiency and overall wellness within the team, which in turn assists us in providing clients with exceptional legal advice and service.

Are you a business that:

• has contracts for multiple types of arrangements?
• sometimes discovers mistakes (or hangovers from previous deals) in your contracts?
• requires efficiency when preparing contracts?
• enters into commercial transactions without contracts - because you don’t have time to properly document the arrangement?
• can’t justify the cost of having a lawyer assist you with all of your contracts?

If the answer to any of the above questions is YES, then Arreis Automation could be of benefit to you. 

Sierra Legal’s new division (Arreis Automation) assists businesses to develop their own template documents, and then builds and hosts bespoke web apps for those businesses – enabling businesses to quickly and easily generate their own contracts and other documents themselves from an online platform.

To find out how Arreis Automation can benefit your business and to see a demo, please visit - https://www.sierralegal.com.au/arreis. Otherwise follow us on LinkedIn to stay up-to-date on legal developments.

Some interesting data from Merrill Corporation on the Australian M&A market for the first half of 2019, including:

• Outbound deal values from Australia exceeded combined inbound and domestic deal values.
• For inbound M&A deals, the top 3 buyer geographies were Canada, Japan and Hong Kong.
• For outbound M&A deals, the top 3 target geographies were USA, the UK and the Czech Republic.
• The key sectors for both inbound and outbound deals have been the energy, services and industrials sectors.

You can sign-up to get the full report via this link: https://www.merrillcorp.com/us/en/insights/reports/ma-market-briefing-australia.html?utm_medium=affiliate&utm_source=mergermarket&utm_content=mergermarket_email&utm_campaign=7010h000001B7F1AAK&dm_i=1D5J,6HT44,PJRLP5,PS5R7,1

If you have any questions on, or need any legal assistance with a merger and acquisition please get in touch with one of the specialists at Sierra Legal.

Customer loyalty schemes is one of the ACCC’s focus areas for 2019.  The ACCC has undertaken a review of customer loyalty schemes in Australia, released a draft report on its findings and proposed recommendations, and is inviting comments on the draft report by 3 October 2019.  Issues raised in the draft report include clear communication of terms and conditions, unfair contract terms, privacy and use of consumer data.  Watch this space for further updates!

https://www.accc.gov.au/media-release/significant-concerns-with-customer-loyalty-schemes

https://www.accc.gov.au/focus-areas/market-studies/customer-loyalty-schemes-review/draft-report-for-consultation

We’re delighted to have Dean Cherny and Marketing Melodies on board and thanks for the great review!

“Arreis Automation used their amazing software and coding skills to automate our template supply contract.  Now, whenever my team needs to produce a supply contract for a new customer, we just open up the link that Arreis has created for Marketing Melodies (complete with our branding!), answer the 30 or so tailored questions that appear at the link, click "submit", and then the completed Word document is automatically emailed to us from the Arreis Automation system ready to go!  This whole process takes us less than 10 minutes, and a high quality document that is correctly worded and formatted is produced every time without any need to involve our lawyers … a massive time and cost saving for us.  Thank you Arreis Automation!!!”

(Dean Cherny, Founder and CEO, Marketing Melodies)

Sierra Legal’s new Arreis Automation system has arrived!

It represents a new and exciting business arm for us, which draws on and complements our growing legal business. If you have a type of contract, letter or other document that you regularly use in your business, Arreis Automation could be for you.

The key benefits and features of Arreis Automation include:

• Documents are generated quickly and efficiently, saving you time and money.
• Designed for use with customised documents, including where complex decision trees, conditional logic and human input would normally be required.
• Automatic completion of mathematical calculations within your documents.
• The ability for multiple documents (or packages of documents) to be created simultaneously using the same data.
• Improved quality control by reducing the risk of human error associated with incorrect data entry, using the wrong base document or unintended “hang overs” from the last time a base document was used.
• Documents are generated in standard Microsoft Word (docx) format, allowing for easy editing and subsequent negotiation.
• The existing document formatting and style used in your business can be consistently applied to the documents as they are created.

Get in touch with one of the Sierra Legal team if you have any questions on Arreis Automation.

Over the last 10 years, one of Sierra Legal’s core service offerings has been helping clients with the development of bespoke template documents for their businesses, including contracts, company secretarial documents, engagement letters and a broad range of other legal documents.

After a couple of years of intense research, development and testing, we are excited to announce that we are close to extending this service to include the coding and hosting of bespoke web apps for our clients. This will enable our clients to automatically generate their own contracts and other documents themselves from Sierra Legal’s online software platform. An official launch and announcement is coming soon.

Watch this space!!

Follow us on LinkedIn or Facebook to stay up-to-date on the launch of this exciting product.

ASX has recently published an updated version of ASX Listing Rules Guidance Note 9 Disclosure of Corporate Governance Practices (Guidance Note 9).  The updates to Guidance Note 9 are due to come into effect on 1 January 2020, which is the same date that the fourth edition of the Corporate Governance Principles and Recommendations (Principles and Recommendations) comes into effect.

Guidance Note 9 provides new and updated guidance on:

• disclosure of corporate governance policies, including the requirement (in conjunction with the Principles and Recommendations) for a listed entity to have and disclose (in full) a diversity policy, code of conduct, whistleblower policy, anti-bribery and corruption policy, and continuous disclosure policy; and
• the ASX Corporate Governance Council’s recommendations on:
• diversity;
• the process to verify integrity of periodic corporate reports;
• investor and analyst presentations;
• environmental and social risks; and
• policy on hedging equity incentive schemes.

The updated Guidance Note 9 can be accessed by the link: https://www.asx.com.au/documents/regulation/asx-gn-9-fourth-edition.pdf and the Principles and Recommendations can be accessed by the link: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf  

Please get in touch with one of the Sierra Legal team if you need any assistance with:

• compliance with the new Principles and Recommendations;
• preparing any new, or reviewing any existing policies to ensure compliance with the new Principles and Recommendations; or
• any other corporate governance matters during the up-coming reporting season, including the preparation of notice of meetings.

The Treasury Laws Amendment (Consumer Data Right) Act 2019 (CDR Act) became law in Australia on 13 August 2019. 

The CDR Act stems from a 2017 Australian Government Productivity Commission inquiry into:

• the recent growth in data generation (by some estimates, the amount of digital data generated globally in 2002 (five terabytes) is now generated every two days, with 90% of the world’s information generated in just the past two years)[1];
• the collection of data through everyday activities, transactions, the Internet and technologies such as mobile devices, sensors and cameras; and
• how better access to and use of data can benefit consumers, the community, business and government.

Given some of the outcomes and recommendations of the inquiry, the CDR Act implements new laws relating to rights associated to consumer data, which the CDR Act refers to as the ‘Consumer Data Right’.  The Consumer Data Right regime is intended to, among other things, give individuals a right to efficiently and conveniently access specified data about them held by businesses and service providers in various sectors (Data Holders).  This is so that individuals can direct how their data is shared with others, for example by choosing how they share their data with certain accredited data recipients (Accredited Data Recipients) in order to find more competitive products or services based on data on existing products or services they use.

The Consumer Data Right regime will apply to sectors of the Australian economy that have been designated in accordance with the CDR Act.  The Government has indicated that the banking sector will be the first sector to which the Consumer Data Right will apply (also known as Open Banking).  The big 4 Australian Banks (i.e. ANZ, CBA, NAB and Westpac, with other banking institutions to follow in due course) must provide individuals with access to their data that is held in respect of their credit and debit cards, deposit accounts and transaction accounts.  Over the next 2 years banks will also be required to provide access to data on other financial product data.   

Please refer to the Treasury’s webpage on the Consumer Data Right for further details on the proposed timetable for implementing the Consumer Data Right regime and Open Banking in Australia:  https://treasury.gov.au/consumer-data-right/

The Government has indicated that the energy and telecommunications sectors will be the next sectors to follow and, eventually, the Government intends that the Consumer Data Right regime will be rolled out to other sectors in the Australian economy.

Who regulates the Consumer Data Right regime?

The Australian Competition and Consumer Commission (ACCC) and the Office of the Australian Information Commissioner (OAIC) will work together to regulate conduct under the Consumer Data Right regime. 

The ACCC will mainly be responsible for matters such as the designation of new sectors to which the Consumer Data Right will apply, the establishment of the Consumer Data Right Rules (CDR Rules), accreditation of Accredited Data Recipients and the creation and maintenance of a register of Accredited Data Recipients and Data Holders.  The ACCC published the CDR assurance strategy for the banking sector on 29 August 2019.  This assurance strategy provides a summary of the ACCC’s testing and assurance scope and approach for ensuring a safe environment for sharing consumer data by consent and ensuring that consumer data rights are protected: https://www.accc.gov.au/focus-areas/consumer-data-right-cdr-0/cdr-assurance-strategy-banking

The CDR Rules will also govern the implementation of the Consumer Data Right in a sector.  The ACCC published a “lock down” version of the CDR Rules for the banking sector on 2 September 2019, which will be provided to the Treasurer for consent: https://www.accc.gov.au/focus-areas/consumer-data-right-cdr-0/cdr-rules-banking

The OAIC will lead on matters relating to the privacy implications of the Consumer Data Right regime, including compliance with new “Privacy Safeguards” under the regime, which will have stricter requirements than the Australian Privacy Principles under the Privacy Act 1988 (Cth).

A data standards body will also be established to assist with making data standards, which will set out the format and process by which data will need to be provided to consumers and Accredited Data Recipients within the Consumer Data Right regime.  Data61 (part of the CSIRO) is currently undertaking this data standards role.

Updates to legislation

The CDR Act implements the news laws by amending legislation that is currently in force in Australia.  A high-level summary of these amendments is as follows:

1. The Competition and Consumer Act 2010 (Cth) is amended to include a new Part IVD relating to the Consumer Data Right, and consequential amendments relating to the Consumer Data Right concepts generally. 
2.  The Australian Information Commissioner Act 2010 (Cth) is amended to:
3. ensure that the OAIC and the Information Commissioner’s privacy functions extend to the Consumer Data Right regime; and
4. ensure that the OAIC is able to disclose information to and advise the body that will be responsible for accrediting Accredited Data Recipients. 
5. The Privacy Act 1988 (Cth) is amended to provide a mechanism for accessing a broader range of information within the designated sectors compared to what is provided for in Australian Privacy Principle 12 (which allows individuals to access personal information about themselves).  The Consumer Data Right applies to data that relates to individual consumers as well as business consumers, and provides access to information that relates to products.

For more information on the CDR Act and Consumer Data Right, please contact:

Mike Jeffery, Director, on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Samantha Khoo, Senior Associate, on M:+61 (0)422 190 433 or E: skhoo@sierralegal.com.au

[1] Australian Government Productivity Commission Inquiry Report, ‘Data Availability and Use - Overview and Recommendations’ No. 82, 31 March 2017 (page 4) https://www.pc.gov.au/inquiries/completed/data-access/report/data-access-overview.pdf

Sierra Legal is proud to have advised Medibank Private Limited on the Medibank Live Better loyalty program.

The Medibank Live Better loyalty program, which was launched this week, will be available to Medibank’s 2.8 million customers through the new Medibank Live Better app.  In an industry first, Medibank customers with eligible hospital or extras cover will be able to earn Live Better points and use these points towards a gift card or premium payment, or to get more on their extras like a remedial massage or physio service, simply by taking a broad range of healthy actions. 

Sierra Legal advised Medibank on a range of matters relating to the Medibank Live Better loyalty program, including the preparation and negotiation of agreements with various Medibank Live Better partners and the development of the program terms and conditions.

We congratulate Medibank on the launch of the Medibank Live Better loyalty program and look forward to following the progress of this program in improving health and lifestyle choices.

Thanks to our friends at eBroker for the opportunity to share our top legal tips when selling a business. The article can be found on the website of eBroker - https://www.ebroker.com.au/News/top-7-legal-tips-when-selling-a-business

If you need any legal advice on either selling or buying a business, please get in touch with one of the Sierra Legal team.

We are excited to announce that Sierra Legal has been successfully reappointed to Medibank’s panel of preferred law firms.  We were first appointed to the Medibank panel 3 years ago, and have really enjoyed assisting Medibank with a broad range of commercial legal matters.  We look forward to continuing to support and work with Medibank over the coming years!

On 1 July 2019, new provisions of the Corporations Act 2001 and the Taxation Administration Act 1953 came into effect to improve “whistleblower” protection in Australia, including the requirement for some companies to have a whistleblower policy.

A “whistleblower”, in relation to a company, includes:

• an individual who is, or has been, an officer or employee of that company and any relative or dependant of that person; and
• an individual who supplies goods or services to that company.

Whistleblower Policy

By 1 January 2020, public companies, large proprietary companies and proprietary companies that are trustees of a registrable superannuation entity must have a whistleblower policy.  It will be a criminal offence if a company that must have a whistleblower policy does not have one. 

The whistleblower policy for such a company must include information about:  

• the protections available to whistleblowers under the legislation (such as maintaining the confidentiality of the whistleblower, protection for whistleblowers against legal action, and protection for whistleblowers from detriment);
• to whom disclosures that qualify for protection may be made (e.g. ASIC, APRA and eligible recipients, being an officer, auditor or actuary of the relevant company), and how disclosure may be made;
• how the company will support whistleblowers and protect them from detriment;
• how the company will investigate disclosures that qualify for protection;
• how the company will ensure fair treatment of employees of the company who are mentioned in disclosures that qualify for protection, or to whom such disclosures relate;
• how the policy is to be made available to officers and employees of the company; and
• any other matters prescribed by regulations.

While only public companies, large proprietary companies and proprietary companies that are trustees of a registrable superannuation entity must have a whistleblower policy, the whistleblower regime under the Corporations Act applies in respect of all companies (regardless of size), while the regime under the Taxation Administration Act is broader and applies in respect of companies, individuals, partnerships, trusts and unincorporated associations. 

As such, even if you are not required to have a whistleblower policy, you must ensure that you are aware of and comply with the relevant whistleblower regime.

ASX Recommendations

For public companies that are listed on the ASX, Recommendation 3.3 of the ASX Corporate Governance Principles and Recommendations (4th Edition) also provides suggested content for whistleblower policies which should be considered.

Recommendations

If you are a company that must have a whistleblower policy, we recommend that you start preparing your policy (if you don’t have one), or start reviewing your current policy (if you do), to ensure it meets the new requirements.  We also suggest that all companies and businesses consider their internal policies, procedures, guidelines and training to ensure they are compliant with the new laws, and that relevant officers and employees understand their obligations.

If you have any questions on the new whistleblower protections or need any assistance preparing a whistleblower policy or internal polices or guidelines, please do not hesitate to contact:

Troy Mossley, Senior Associate, on M: +61 (0) 403 212 939 or E: tmossley@sierralegal.com.au

Ken Gitahi, Senior Associate, on M: +61 (0) 401 450 220 or E: kgitahi@sierralegal.com.au

Congratulations to Chris Keay and Landscape Plus on the completion of the sale of a majority stake in Landscape Plus to Outside Ideas. It was a pleasure working with Chris and his team, and we wish the newly formed JV every success!

Sierra Legal enjoyed giving a presentation this week at the Mornington Hotel to a group of newsagent owners, various suppliers to the newsagency industry and members of the VANA Ltd Board. Our presentation shared a few practical tips and traps in selling your business, including:

• having the right corporate structure in place;
• getting your backyard in order;
• appointing your advisers early;
• working out the best sale structure;
• marketing your business;
• using a term sheet before going to formal contracts;
• allowing for due diligence by the purchaser;
• getting drafting control of the transaction documents;
• being wary of earn-outs;
• being wary of warranties in the sale and purchase agreement;
• minimising conditions precedent;
• not losing focus on your business during the sale process; and
• recognising that the deal isn't done until completion occurs.

Thanks to our friends at eBroker for the opportunity to share our top legal tips when buying a business. Stay tuned for our top legal tips when selling a business.

If you need any legal advice on either selling or buying a business, please get in touch with one of the Sierra Legal team (https://lnkd.in/g77qGmt).

The article is available on the website of eBroker - https://www.ebroker.com.au/News/top-5-legal-tips-when-buying-a-business

Author: Craig Sanford, DIrector

In a post a couple of weeks ago (click here), I gave 5 tips for sellers of businesses in relation to earnouts. As most of you will know, an earnout is the right of a seller to receive additional compensation in the future if the business that was sold achieves certain financial goals after completion of the sale (e.g. earnings over a specified threshold level).

In this week’s post, I suggest some specific earnout protection mechanisms that sellers could try to include in business sale agreements that contain earnout provisions. You will be unlikely to get away with all of these protections as a seller, but the more the better for a couple of reasons:

1. You will hopefully increase the potential amount of the earnout … and the likelihood of being paid by the buyer.
2. If the relationship between the seller and buyer breaks down during the earnout period (which in my experience isn’t unusual!), then the more control and other protections you have as a seller in the business sale agreement, the more negotiating power you will have in negotiating a favourable alternative arrangement with the buyer.

So here are some of my suggested earnout protections for sellers:

1. Try to retain some control over the business post-sale

One of the best ways to protect yourself as a seller in relation to an earnout, is to retain as much control as possible over the way the business is run after completion.

This could include retaining one or more board seats and/or a shareholding in the company that conducts the business.

Where a shareholding is retained, a shareholders agreement would ideally be entered into. This agreement could give the seller an opportunity to gain even more control during the earnout period – for example, the agreement could specify a list of significant decisions where the unanimous approval of shareholders is required.

The business sale agreement could also contain a number of other controls for the seller – a few of these are suggested below.

2. Ask buyer to comply with specific obligations during earnout period

As the seller, you should try to require the buyer to comply with a number of positive obligations in the operation of the business in order to maximise and protect your earnout.

These obligations could include a requirement in the business sale agreement that the buyer, during the earnout period:

• acts in good faith in all of its dealings with, and in relation to, the seller and the business;
• conducts the business in substantially the same manner as it was conducted by the seller during the 12 months leading up to completion;
• ensures that the business maintains all existing customer and supplier relationships to the extent that they are in the best interests of the business;
• maintains costs and expenses of the business at a level that does not materially exceed the level of costs and expenses incurred in the past by the Company; and
• ensures that the company is treated as a separate entity for accounting purposes, operating at arm's length from any related entities of the buyer.

3. Ask buyer to comply with “negative covenants” during earnout period

In addition to the above obligations, as the seller, you also should try to require the buyer to comply with a number of “negative covenants” in the operation of the business during the earnout period. In other words, the business sale agreement should prohibit the buyer from doing a number of specified things during the earnout period in the conduct of the business (without getting the prior written consent of the seller), such as:

• materially changing the nature or scale of the business or the manner in which the business is conducted;
• anything which:
• is not in the ordinary course of the business;
• has the intention of reducing the revenue or earnings of the business;
• is in breach of any contract to which the company is a party (including any shareholders agreement entered into between the buyer and the seller in relation to the company); or
• has the intention of diverting opportunities (within the scope and capabilities of the business) to any related entities of the buyer;
• disposing of the business, all (or any material part) of the assets owned or used in the business, or any shares or other securities in the company;
• passing a resolution to wind up the company or to cause the company to stop carrying on any part of the business;
• charging the business for goods or services provided by the buyer or any related entity of the buyer, other than reasonable charges based on the services provided, or arm’s length charges to be agreed with the seller;
• entering into any contract outside of the ordinary course of the business, or which is not on arm’s length terms;
• sub-contracting or otherwise transferring any revenue-generating activity of the business to another entity; or
• delaying or deferring the recognition or bringing to account of any revenue or profits by the company, or bringing forward any expenses of the company, in a manner which is contrary to the agreed accounting policies of the company.

4. Provide for specific compensation for buyer’s breach

The business sale agreement should make it clear what happens if the buyer breaches any of the above earnout obligations and negative covenants. This will hopefully provide a stronger incentive for the buyer not to deviate from its obligations.

For example, the agreement could state that if the buyer breaches, and the seller reasonably believes that the buyer’s breach has had an adverse effect on the potential earnout amount payable to the seller, then:

• the seller can appoint an expert to determine the amount by which the earnout amount is likely to have reduced as a result of the buyer’s breach; and
• this amount would be added to the actual earnout amount payable to the seller after the end of the earnout period.

5. Ask for an “accelerated earnout” if the buyer seriously misbehaves

When acting for a seller, I often try to include an “accelerated earnout” provision in the business sale agreement, as a further incentive for the buyer not to deviate from its obligations.

An “accelerated earnout” provision will state that if certain specified events occur during the earnout period, then the earnout period will be taken to have ended and the calculation and payment of the earnout amount will be immediately brought forward. Some of these specified events may include:

• the buyer failing to maintain any required earnout security for the duration of the earnout period;
• the buyer or the company committing a material breach of the business sale agreement (or of any shareholders agreement) that is not capable of remedy or that has not been remedied within a specified period;
• an insolvency event occurring in respect of the buyer or the company;
• a change of control occurring in relation to the buyer or the company (or the buyer otherwise ceasing to be a shareholder of the company); or
• any employment or consultancy agreement under which the seller (if an individual) or a director of the seller (if a company) is employed or engaged by the company during the earnout period, is terminated by the company, other than by mutual consent or on grounds justifying termination with immediate effect.

6. Include detailed principles for calculating the earnout amount

The business sale agreement should include detailed principles for calculating whether, at the end of the earnout period, the relevant financial goal(s) for the earnout payment (e.g. earnings above a certain level) have been achieved.

The basic idea with these principles is to ensure that this calculation is made on a reasonable basis, including the exclusion of “abnormal” expenditure and other items from the calculation. For example, if the business is being sold into a large corporate group, the principles should make it clear how to account for head office expenses charged to the business.

Make sure you get an accountant experienced in M&A to prepare these earnout principles.

7. Ask for security for the earnout payment

The buyer would ideally be asked to provide some form of security for the earnout payment.

There are a number of different security mechanisms that I have got away with in the past, but a common one I use is a simple guarantee and indemnity from another company of substance that is a related body corporate of the buyer, and possibly even a personal guarantee and indemnity from one or more directors or shareholders of the buyer.

In summary, the key to earnout provisions for a seller is to maximise the number and extent of controls that the seller has over the buyer and the business during the earnout period, as well as providing for specific (and serious) consequences for the buyer if the buyer does not fully comply with these controls.

It was lights, camera and action for Craig Sanford at VANA, as he was interviewed by VANA’s General Manager, Brendan Tohill, in a recent "video newsletter" - see below for a snippet of the action! VANA is an important client of Sierra Legal, and we are also promoted by VANA as a preferred supplier of legal services for newsagency businesses that are members of the Association.

View here

Author: Craig Sanford, Director

When it comes time to sell your business, a large part of the negotiations will often be around the terms of an "earnout" - that is, the right of the seller to receive additional compensation in the future if the business achieves certain financial goals after completion of the sale (e.g. earnings over a specified threshold level). Based on my experience over the last 26 years buying and selling businesses, here are a few tips for sellers in relation to earnouts:

Try to avoid them!

A lot of people seem to assume that every business sale must involve an earnout, but it doesn't have to be the case. Sierra Legal recently acted for the seller of a consumer finance business, who walked away with over $10 million on completion of the deal. The buyer wanted the business so badly that there was no earnout component, and the seller received all of his consideration upfront. With no earnout and no requirement for the seller to continue working in the business after completion, the seller and his wife were able to enjoy a 12 month holiday in Europe immediately following the sale! On the flipside, when earnouts are involved, they often end in tears - after completion, the buyer will want to run the business their way, whereas the seller will often not agree with the buyer's approach and so will have concerns that this is impacting on the seller's earnout. The moral of the story is don't automatically agree to an earnout!

Assume the worst case scenario

If you have to agree to an earnout, I generally advise sellers when considering whether or not to agree to a deal, that they should assume the money they get on completion for selling their business could very well be the only consideration they receive, and that any earnout payment they get in the future should only be seen as a "bonus". Sellers often make the mistake of "banking on" an earnout payment, only to see the business going downhill after completion and their earnout disappearing. If you're not happy with the amount of the completion payment as the only payment you could receive for the sale of your business, then think twice about doing the deal. For this reason, try to get as much of the consideration paid upfront as possible, and try to keep the amount of the purchase price tied up in an earnout as small as possible (ideally, no more than 20 - 30%) and with the duration of the earnout being as short as possible (ideally, no more than 1 year).

Get good tax advice

As with any M&A deal, make sure you get advice from your tax adviser before negotiating a deal. By way of example, in some circumstances, the rights associated with an earnout can be considered by the ATO to be a separate asset for capital gains tax purposes.

Is the earnout achievable?

A positive feature of an earnout for a seller is that it can give the seller an ability to achieve a significant upside in consideration if the relevant financial goals are achieved after the business is sold (which would not have been available to the seller if the consideration had been paid entirely upfront). It is obviously crucial for the seller to protect this potential upside and ensure that it is achievable. Therefore, if you have to agree to an earnout, you need to do some due diligence on the buyer and get comfortable that the nature of the buyer and its people (and the terms of the earnout) are such that the financial goals for the earnout are achievable when the buyer is in effective control of the business.

Include earnout protections in your transaction documents

As part of protecting your earnout and the potential upside, make sure that your lawyers include comprehensive protections in the sale and purchase agreement (and other relevant transaction documents, such as a shareholders agreement if the seller is retaining an ownership interest in the business being sold). I remember seeing a sale and purchase agreement (drafted by a law firm that wasn't Sierra Legal!) which did not contain any such protections. In that matter, the seller sold all its shares in the target company to a buyer, and then shortly after completion of the sale, the buyer sold the underlying assets and business of the company to a third party. Since the company no longer had a business, it obviously couldn't generate any earnings, which in turn made it impossible to achieve the relevant financial goals for the earnout. The sale and purchase agreement should have covered this off, but it didn't … and the seller sued its lawyers! Over the next couple of weeks, I will share with you some of my suggestions for appropriate earnout protections that a seller should try to include in transaction documents when selling a business.

Sierra Legal would like to congratulate the purchaser of Allstates Vehicle Logistics Pty Ltd (also known as "Spiral Logistics"), on its recent acquisition of the company.  Allstates is a leading Australian logistics company for specialised freight, and focuses on providing transport services to the steel industry in Victoria, New South Wales and Queensland.  Sierra Legal advised the purchaser on legal aspects of the acquisition, including due diligence, negotiation of the legal documents and completing the transaction.  We look forward to following the progress of Allstates under its new management team as it drives forward with some exciting plans to enhance its service offering and further develop and grow the business throughout Australia.

Sierra Legal is excited to once again be named as a finalist in the Boutique Firm of the Year award category at the 2019 Australasian Law Awards. 

The last 12 months have been massive for us… and 2019 is shaping up to be even better!

Thanks to all of our clients, colleagues, referrers, family and friends for their continued support.

The Personal Property Securities Register (PPSR) began operating on 30 January 2012, and therefore, its 7-year anniversary fast approaches.

Since the default registration period on the PPSR starts at 7 years, many security interests that were registered soon after the commencement of the PPSR for the default 7-year registration period, will begin to expire from January 2019.  It is estimated that more than 100,000 registrations could fall in this category.

It is important to note that once security interest registrations on the PPSR expire, they cannot be renewed.  Therefore, PPSR registrations that are about to expire must be renewed before they expire, to ensure that they maintain their priority.

The lapse of a registration on the PPSR could put the relevant personal property at possible risk, and a new security interest registration would be required, which would affect the priority of the registration.

It is therefore important to urgently check when your security interest registrations are due to expire.  One way to do this is to obtain a free “Registrations due to expire report” from the PPSR website.  Click here for instructions on how to obtain this report.

Click here for instructions on how to renew current PPSR registrations.

For more information on renewing PPSR registrations and for general advice on the PPSR, please contact:

Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Ken Gitahi, Senior Associate, Sierra Legal on M: +61 (0)401 450 220 or E: kgitahi@sierralegal.com.au

Sierra Legal would like to congratulate Australasian Machinery Sales Pty Ltd (AMS), which operates the “Trout River Australia” business, on completion of its sale to MaxiTRANS Australia Pty Ltd, a subsidiary of MaxiTRANS Industries Limited (ASX:MXI).

Trout River Australia is a leading Australian manufacturer and supplier of live bottom trailers in Australia, and MaxiTRANS is one of Australia’s largest suppliers of truck and trailer parts to the road transport industry in Australia.

The sale of AMS will be completed in 2 tranches.  The first tranche (being the acquisition of 80% of the issued shares in AMS) was completed on 12 December 2018.  The second tranche (being the acquisition of the remaining 20% of the issued shares in AMS that are not owned by MaxiTRANS) is expected to be completed around 30 June 2021 under an earn-out arrangement.

Sierra Legal assisted AMS and its founding shareholders on all aspects of the sale to MaxiTRANS, including:

• legal due diligence;
• drafting and negotiating transaction documents; and
• assistance with completion of the first tranche of the sale.

For more information, please contact Craig Sanford, Michael Jeffery or Ken Gitahi at Sierra Legal.