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.

This month we have welcomed back Jenny Lau who has just returned from maternity leave.  It is great to have her back on the team!  

The ACCC has published an enforcement update relating to a recent Federal Court declaration that 12 terms in standard form contracts used by 2 subsidiaries of Servcorp Ltd were unfair, and therefore void.

Servcorp Ltd is one of the largest suppliers of serviced office space to small businesses in Australia.  The terms declared to be unfair included those that had the effect of:

• automatically renewing a customer’s contract, unless the customer had opted out, and allowing Servcorp to then unilaterally increase the contract price;
• permitting Servcorp to unilaterally terminate contracts;
• unreasonably limiting Servcorp’s liability or imposing unreasonable liability on the customer; and
• permitting Servcorp to keep a customer’s security deposit if a customer failed to request its return.

The ACCC instituted proceedings against Servcorp Ltd and its 2 subsidiaries (Servcorp Parramatta Pty Ltd and Servcorp Melbourne 18 Pty Ltd) in September 2017.  The action against Servcorp and its subsidiaries was only the 2nd business-to-business unfair contract terms case that the ACCC had commenced since the unfair contract terms regime came into effect in November 2016.

In addition to the declaration that 12 terms in its standard form contracts were unfair, and therefore void, the other outcomes for Servcorp were that:

• Servcorp was ordered to pay the ACCC’s legal costs relating to the proceedings; and
• Servcorp has been required to establish an unfair contract terms compliance program for its Australian business.

Click here for a link to the ACCC enforcement update.

Key Points

Some key points to note about the unfair contract terms regime in Australia are as follows:

• The Australian Consumer Law protects small businesses from unfair terms in “standard form contracts”.
• A “standard form contract” is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms – that is, it is offered on a ‘take it or leave it’ basis.
• The law relating to unfair contract terms applies to standard form contracts entered into or renewed on or after 12 November 2016, where:
• the relevant contract is for the supply of goods or services or the sale or grant of an interest in land;
• at least one of the parties is a small business (i.e. a business that employs less than 20 people, including casual employees employed on a regular and systematic basis); and
• the upfront price payable under the contract is not more than $300,000 (or $1 million if the contract is for more than 12 months).
• If a standard form contract that was in operation before 12 November 2016 is varied on or after 12 November 2016, the law relating to unfair contract terms applies to the varied terms.
• If a court or tribunal finds that a term 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. 
• If a party to a contract seeks to apply or rely upon a term that a court has declared unfair, the court may grant:
• an injunction restraining the other party from acting upon the term;
• compensation; and
• any other orders that the court thinks appropriate.
• Examples of terms that may be unfair include:
• terms that enable one party (but not another) to avoid or limit their obligations under the contract;
• terms that enable one party (but not another) to terminate the contract;
• terms that penalise one party (but not another) for breaching or terminating the contract; and
• terms that enable one party (but not another) to vary the terms of the contract.
• The law relating to unfair contract terms does not apply to certain standard form contracts, such as:
• contracts entered into before 12 November 2016 (unless renewed on or after that date);
• shipping contracts; and
• constitutions of companies, managed investment schemes or other kinds of bodies.

For more information on the unfair contract terms regime in Australia, and for general Australian Consumer Law compliance advice, 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

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

Sierra Legal is now offering 3 new products aimed at increasing the accessibility of top-quality legal advice for businesses of all sizes.

• Sierra Monthly Plan - Under a Sierra Monthly Plan, Sierra Legal provides expert corporate and commercial legal advisory services for a fixed monthly fee, rather than the traditional method of charging clients based on the number of hours spent providing those services.
• Sierra Virtual - Sierra Virtual provides on-call, flexible and experienced legal counsel for in-house legal teams that are under-resourced, or under pressure due to busy periods or staff absences, or to corporate law firms who may need additional resources during large projects.
• Free Contract Health Check - A Free Contract Health Check can help give you peace of mind by confirming that you have an effective and compliant contract or other legal document in place, or by identifying potential areas for improvement to better protect your business.

Follow these links for additional information regarding these 3 legal products: Sierra Monthly Plan, Sierra Virtual and Free Contract Health Check.

In our first 3 articles in this series ("Proper preparation prevents poor performance", "Get your backyard in order" and "Transaction documents") we set out our top 10 tips and traps for sellers to consider when they are proposing to sell their business.  Our final 2 tips relate to the completion and post-completion stages of the transaction.

Tip 11 - The deal isn’t done until completion occurs

• Keep pressure on after signing and use a “completion agenda”.  People often fall into the trap of thinking that the deal is done once a sale and purchase agreement is signed, but this is often not the case and a lot of work still needs to be done (such as satisfying conditions precedent and getting ready for completion).
• Don’t announce the deal early unless you are required to do so as a matter of law (e.g. to comply with ASX continuous disclosure requirements).  If the transaction does not complete (e.g. because certain conditions precedent cannot be satisfied), then seller may have PR and HR issues to contend with in circumstances where employees, customers and suppliers becoming aware of the proposed sale.
• When organising the release of registrations on the Personal Property Securities Register, start the process early. The buyer will likely require all PPSR registrations to be released prior to or at completion and it can be difficult to convince secured creditors and other third parties that hold PPSR registrations over a target business to release those registrations quickly. There may also be historical registrations that haven’t been released (even though they are no longer relevant) and reconciling all of the registrations can be time consuming.

Tip 12 - Don’t forget steps after the champagne is popped

• There are often still a number of steps that need to be finalised after completion of the sale (including ASIC filings, asset transfers (e.g. motor vehicles), escrow arrangements, preparation of completion accounts, assisting the buyer with hand-over queries, transitional services, restraint periods, and warranty claim periods).
• Prepare a timetable of all the post-completion steps and diarise the relevant dates/deadlines.

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

For more information, 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

In our first two 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. 
• 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 incurred when negotiating the documents back to a reasonable position.
• In our experience, it is better (from a seller's perspective) for the seller to prepare the first draft of all transaction documents, but to also be “commercial” when preparing those transaction documents (as documents that are too one-sided will often lead to lengthy negotiations, or even result in a potential buyer walking from the deal).

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 - 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 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 risk associated with the earn-out or other form of deferred consideration - e.g. 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 and requiring accelerated payments if certain events occur (e.g. buyer on-sells the business or key assets, or breaches other restrictions).

Tip 9 - Consider the limitations on potential warranty claims

• Other than the amount of the purchase price, the warranties and the limitations on warranty claims are the aspects of sale and purchase agreements that are usually most heavily negotiated.
• Sellers should try to impose:
• Time limits on warranty claims (i.e. deadlines within which potential warranty claims need to be commenced); 
• Financial limits on warranty claims (i.e. capping the amount that may need to be paid as part of a warranty claim); and
• other restrictions (including preventing warranty claims for matters that were disclosed to the buyer as part of due diligence - which reinforces the importance of having a comprehensive data room).
• Depending on the size of the transaction, warranty and indemnity insurance may also be an option to consider.

Tip 10 - Minimise conditions precedent

• The conditions precedent in a sale and purchase agreement are the key requirements that need to be satisfied before the parties have an obligation to proceed with completion of the transaction. 
• Typical conditions include matters such as obtaining necessary regulatory approvals, obtaining third party assignment or change of control consents and the parties also entering into any other required transaction documents.
• From the seller's perspective, it is important to try to avoid conditions precedent that are entirely in the hands of the buyer to complete and which easily allow the buyer to pull out of the deal (giving the seller limited certainty that the transaction will proceed).  Examples include conditions requiring the buyer to obtain board approval (or shareholder approval - in circumstances where it is not a regulatory requirement) or the buyer obtaining finance. 
• If these type of conditions are unavoidable, the seller should consider requiring a non-refundable deposit so that the buyer is incentivised to ensure that the conditions are satisfied as quickly as possible.  

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

Look out for our final article in this series, which will be released in the next few weeks.

For more information, 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

The ASX has recently updated Guidance Note 8 (Continuous Disclosure) to address the practice of listed entities commissioning and publicising research reports which include objectionable material that the entity itself could not publish (e.g. information about exploration results, mineral resources, ore reserves or a production target that does not comply with the JORC Code or research reports with an estimate of earnings or other forward looking financial information that does not meet the requirements of relevant ASIC Regulatory Guides).

Section 4.15 of Guidance Note 8 now states that:

Generally speaking, an entity should not submit:

• a broker or analyst research report about the entity; or
• an announcement about the issuance of, containing an extract from, or referring or including a hyperlink to, such a report,

for publication on the ASX Market Announcements Platform under Listing Rule 3.1. Any market sensitive fact-based material in such a report should already have been released by the entity under that rule beforehand and so it can reasonably be inferred that the entity is seeking to publish or draw attention to the report for its opinion-based material (such as the broker’s or analyst’s buy recommendation, price target or earnings estimates).  This will raise an issue about whether the report is really being published for promotional rather than informational reasons.  It may also raise concerns about whether the entity is impliedly endorsing any price target, earnings estimates or other forward looking financial information in the report.  For these reasons, ASX is likely to refuse to allow an entity to publish such a report or announcement on the ASX Market Announcements Platform without a detailed and acceptable explanation as to why the entity considers this information to be market sensitive.

If an entity does happen to publish such a report or announcement on the ASX Market Announcements Platform without pre-clearing it with ASX Listings Compliance, ASX may require the entity to make a further announcement addressing the concerns mentioned in the preceding paragraph.  Further, if the report contains material that ASX considers objectionable, ASX may also require the entity to publish an announcement withdrawing or retracting the objectionable material and advising investors not to make any investment decision based on it.

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

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

In our last 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 attempting to sell their business.  Our next 3 tips relate to 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.
• The categories of key documents/information that a potential buyer is likely to want to review during due diligence is contained in the mergers and acquisition planning checklist referred to below.    

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

• An indicative offer, heads of agreement or 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 (and possibly 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 (a.k.a RFIs)).
• 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 making a claim against 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.
• Seller’s should consider using an online data room (such as the system offered by Ansarada) with document security controls (e.g. restrictions on copying, printing or sharing documents) rather than an online file sharing service like Dropbox.

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

Look out for the next article in this series, which will provide some tips and traps relating to M&A transaction documents.

For more information, 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

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 parties that are looking to sell their businesses.

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

Is your business operated through a company, unit or discretionary trust, or by you personally as a sole trader?  Business operators typically consider business structuring issues from their own personal legal and financial risk minimisation perspective.  But when structuring your business, always plan for the possibility of a future exit.  Consider how each structure will impact on a future sale and how each option will impact a potential buyer.

If you need to restructure your business immediately before a sale, this could:

• delay the transaction;
• scare off buyers; and/or
• cause additional expense,

and may have adverse tax consequences (e.g. stamp duty or capital gains tax from shifting assets).

Tip 2 - Appoint your advisers early

• Seek help from professional advisers before approaching or engaging in discussions with any potential buyer(s).  Advisers are less likely to act for you (particularly on a "success fee" basis) if your business has already been "shopped around".  You will typically only get one opportunity to approach and impress a potential buyer, so ensure that you give the best possible impression by seeking advice on the optimal way to market your business and to rectify potential "deal killers" before they are discovered by a potential buyer.
• The necessary advisers for a M&A transaction typically include corporate advisers, lawyers and accountants/tax advisers.  They need to be experienced in M&A transactions (as this is a specialist area).   
• When engaging lawyers, accountants or tax advisers, get cost estimates up front, ideally with fee caps or fixed fees.
• When engaging corporate advisers, try to agree a fee structure that incentivises the corporate adviser to maximise sale price (e.g. a "success fee" with ratcheting increases for exceeding your expected valuation).

Tip 3 - Share sale vs asset sale

• Consider how the transaction is to be structured – i.e. the shareholders selling their shares in the company that operates the business or the operating entity selling its assets.
• The tax outcomes are often better for the seller if the transaction is a share sale – but buyers may be reluctant to take on all the historical liabilities associated with the company.
• Buyers often prefer an asset sale (as the buyer may choose the assets to be acquired and leave behind most liabilities).
• Further to Tip 1 above, if you operate your business as a sole trader or through a trust, the transaction will normally need to be structured as a sale of the assets (so your transaction structuring options become more limited).

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

Look out for the next article in this series, which will provide some tips and traps relating to due diligence and indicative offers.

For more information, 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

On 19 March 2018, the Federal Court imposed a $300,000 penalty against online business directory service ABG Pages Pty Ltd for engaging in systemic unconscionable conduct, undue harassment, and making false and misleading representations in relation to its online advertising services.  The sole director of ABG Pages, Ms Michelle McCullough was ordered to pay a penalty of $40,000 and was disqualified from managing corporations for 5 years.

The ACCC instituted proceedings against ABG Pages in December 2016 alleging a raft of breaches of the Australian Consumer Law, including:

• falsely representing that large businesses purchased its directory services;
• using high pressure sales tactics to sell listings on its online business directory;
• misleading businesses into entering one or more contracts;
• refusing to cancel contracts which customers did not want;
• misleading businesses about the total duration and the total price of contracts;
• misleading businesses into entering into second or subsequent contracts for additional listings; and
• unduly harassing customers by repeatedly contacting them for payments.

Of particular note were the high pressure sales tactics used by ABG Pages to sell listings on its online business directory.  Such conduct included chasing debts that did not exist, with one customer called 993 times by ABG Pages over a nine-month period.

ABG Pages and Ms McCullough admitted to various breaches of the Australian Consumer Law and the ACCC action resulted in the closure of the ABG Pages business in 2016.  The Federal Court also ordered ABG Pages and Ms McCullough to jointly make a $25,000 contribution towards the ACCC’s costs and that Ms McCullough attend an ACL compliance program.

In successfully bringing proceedings against ABG Pages, the ACCC has sent a clear message that making false or misleading representations, engaging in high pressure sales tactics and unduly harassing customers to enter into contracts or pay invoices, are not legitimate business strategies.

It should also be noted from this case that the potential penalties under the Australian Consumer Law for engaging in such conduct are significant.

Click here for a link to the ACCC media release on the proceedings against ABG Pages and Ms McCullough.

For general Australian Consumer Law compliance advice, 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

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

Sierra Legal is excited to be named as a finalist in the “Boutique Firm of the Year” award category at the 2018 Australasian Law Awards!  Thanks to all our clients for the continued support.

The ASX has published a compliance update which, among other things, summarises updates to various Listing Rule Guidance Notes.  The updates were released by the ASX on 9 March 2018 and the following Guidance Notes are affected:

1. Guidance Note 1 - Applying for Admission

The updates include further commentary in section 3.8 on using artificial means to achieve spread and in section 3.19 relating to the ASX's good fame and character requirements.

2. Guidance Note 8 - Continuous Disclosure

The updates include:

• additional guidance in section 4.15 on the ASX's disclosure expectations for material contracts;
• removing a reference in section 4.20 to disclosing the impact of material contracts on revenue, costs or profits;
• expanding the guidance in section 5.10 to address the new insolvent trading safe harbour for directors in s588GA of the Corporations Act and what should be disclosed when an entity in financial difficulty requests a voluntary suspension to complete a transaction necessary for its survival; and
• clarifying aspects of example D in Annexure A.

3. Guidance Note 12 - Significant Changes to Activities

The updates include changes:

• reflecting a change in policy for back door listings (which is effective immediately) requiring all directors or proposed directors to provide evidence of their good fame and character, including existing directors who have been elected by shareholders to the board; and
• clarifying the accounts that need to be disclosed in an announcement under Annexure A to that Guidance Note.

4. Guidance Note 16 - Trading Halts and Voluntary Suspensions

This guidance note has been updated to reflect the changes to section 5.10 of Guidance Note 8 as mentioned above.

Click here for a link to the ASX compliance update.

For more information regarding the updates to these guidance notes, and for general ASX Listing Rule compliance advice, please contact:

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

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

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

In a compliance update released on 15 March 2018, the ASX has highlighted recent incidents where disclosures by listed entities about their contractual arrangements with customers has fallen short of the required standards.

Section 4.15 of Guidance Note 8 provides that announcements regarding the signing of a market sensitive customer contract should generally include information about:

• the name of the customer;
• the term of the contract;
• the nature of the products or services to be supplied to the customer;
• the significance of the contract to the entity;
• any material conditions that need to be satisfied before the customer becomes legally bound to proceed with the contract; and
• any other material information relevant to assessing the impact of the contract on the price or value of the entity's securities.

The ASX has used this compliance update to remind listed entities that, if a listed entity fails to comply with the required disclosure requirements, the ASX will not hesitate to suspend the entity, query it and require it to correct any inadequate or misleading disclosures. The ASX will also refer the entity to ASIC to consider regulatory action.

Listed entities should also be aware of the significant criminal and civil consequences that can apply where a market announcement does not meet the requirements of Listing Rule 3.1 or is misleading or deceptive.  These potential consequences are set out in Annexure B of Guidance Note 8.

Click here for a link to the ASX compliance update.

For more information on the disclosure requirements relating to customer contracts, and for general ASX Listing Rule compliance advice, please contact:

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

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

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

Sierra Legal has developed an innovative monthly services package for selected clients. In simple terms, it involves Sierra Legal providing expert legal services for a fixed monthly fee, rather than the traditional method of charging clients based on the number of hours spent providing those services.

Our monthly services package offers clients a number of advantages, particularly in that it encourages early and regular contact with experienced legal advisers (rather than seeking advice after issues have escalated), and without the fear of receiving unexpected invoices for legal fees.

For more information, see our Monthly Services Package page.

Sierra Legal would like to congratulate SPAC Logistics Pty Ltd on its recent acquisition of Josie’s Transport Group.  Josie's Transport Group is a business-to-business courier service that primarily operates in the Geelong and Melbourne areas (with the ability to also service Warrnambool and Ballarat, and other Victorian and interstate destinations).

Sierra Legal assisted with all legal aspects of the transaction including:

• drafting and negotiating transaction documents; and
• assisting with completing the transaction.

For further information, please contact Craig Sanford or Samantha Khoo. 

Sierra Legal is pleased to announce that Kenneth Gitahi has joined the group as a Senior Associate.

Ken specialises in mergers and acquisitions and equity capital markets. 

For more information, see: https://www.sierracorp.com.au/team/  

On 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Treasury Laws Amendment Act) received Royal Assent.  The Treasury Laws Amendment Act creates major changes to Australia’s insolvency law regime by introducing:

• a “safe harbour” for company directors to avoid contravening the insolvent trading provision in the Corporations Act 2001 (Corporations Act); and
• provisions making “ipso facto” clauses unenforceable while a company is undergoing specified restructuring or other arrangements aimed at avoiding being wound-up in insolvency.

The new safe harbour provisions came into effect on 19 September 2017 and the changes to the ipso facto laws are expected to come into effect on 30 June 2018.

Background to the Treasury Laws Amendment Act

Australia has had very strict laws aimed at preventing companies from trading while insolvent.  Section 588G of the Corporations Act imposes a statutory duty on company directors to prevent insolvent trading, making the directors personally liable for debts that are incurred and imposing civil and criminal penalties.  In addition, ipso facto clauses (i.e. those that allow one party to terminate or modify a contract on the occurrence of a specified event, such as an insolvency related event) can adversely impact the ability of a company suffering financial difficulties from restructuring, selling assets or trading out of those financial difficulties.

It is hoped that the new provisions will:

• reduce the number of premature formal insolvency processes;
• encourage more early stage investors and professional directors to become involved in start-up companies by reducing the stigma associated with being involved with an insolvent company; and
• give Australian companies facing financial difficulties a better chance of being restructured or turned around (with a view to preserving value for creditors and shareholders). 

Safe Harbour

The Treasury Laws Amendment Act introduces a new section 588GA into the Corporations Act which provides that the civil insolvent trading provisions of section 588G(2) of the Corporations Act do not apply to a person and a debt (i.e. creates a “safe harbour”) if, after the person starts to suspect that the relevant company may become (or already is) insolvent, that person starts developing a course of action that is reasonably likely to lead to a better outcome for the company (Improvement Action) and the debt is incurred in connection with that Improvement Action.  

Key points relating to the operation of the safe harbour are as follows:

• The safe harbour period starts to apply from the time the person starts developing the Improvement Action (including any decision-making period relating to that Improvement Action and any period required to obtain initial advice). 
• The Improvement Action must be taken within a reasonable period for the safe harbour to remain in place, and the safe harbour applies until the director or company stops taking the Improvement Action, the Improvement Action stops being reasonably likely to lead to a better outcome for the company or the company goes into administration or liquidation.
• The Treasury Laws Amendment Act includes a non-exhaustive list of factors that may be considered relevant when determining whether any Improvement Action is reasonably likely to lead to a better outcome for the relevant company.  For example, whether the person/director has:
• kept him/herself informed about the company’s financial position;
• taken appropriate steps to prevent misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts
• taken appropriate steps to ensure the company is maintaining appropriate financial records;
• obtained advice from appropriately qualified advisers who were sufficiently informed; or
• developed or implemented a plan to restructure the company to improve its financial position. 
• During the safe harbour period, directors must continue to comply with their other duties under the Corporations Act and (if applicable) the company and its officers must also continue to comply with the continuous disclosure obligations under the Corporations Act and the ASX Listing Rules.

The safe harbour will be unavailable in certain circumstances, such as where the company has not been paying its employees, complying with its tax reporting obligations, or if a person seeking to rely on the safe harbour fails to substantially comply with obligations to assist an administrator, liquidator or controller that is later appointed under a formal insolvency process.  

Stay on enforcing ipso facto clauses

The amendments in the Treasury Laws Amendment Act provide for a stay against the enforcement of rights that amend or terminate an agreement to which a company is a party in the following circumstances:

• because of the company entering into a compromise or arrangement under Part 5.1 of the Corporations Act (where the scheme is for the purpose of avoiding insolvent liquidation);
• where a receiver or managing controller is appointed over all or substantially all of the property of the company under Part 5.2 of the Corporations Act; or
• where the company is placed into voluntary administration under Part 5.3A of the Corporations Act. 

Key points relating to the operation of the stay are below:

• The “stay period” (generally) begins and ends at the following times:
• In the case of a compromise or arrangement under Part 5.1 of the Corporations Act (scheme), the stay period starts when the scheme is publicly announced and ends on the later of:
• if the company fails to make the scheme application within 3 months after the announcement, at the end of that 3 month period;
• when the scheme application is withdrawn or dismissed by the court; or
• when the scheme ends, unless this occurs because the company is to be wound up (in which case the stay period ends when the company’s affairs have been fully wound up). 
• In the case of receivership or appointment of a managing controller, the stay period starts when the receiver or managing controller is appointed and ends when the receiver’s or managing controller’s control ends.
• In the case of a voluntary administration, the stay period starts when the company enters into administration and ends when:
• the administration ends; or
• the company’s affairs have been fully wound up, 

whichever is the later.

• The right to amend or terminate an agreement under an ipso facto provision will also continue to be unenforceable indefinitely after the end of the stay period, where the reason for enforcing the relevant amendment or termination right relates to the company having been under one of the specified forms of restructuring arrangements referred to above or because of its financial position before the end of the stay period or in certain other prescribed circumstances (including where the reasons are in substance contrary to the stay provisions).
• The stay does not apply to agreements made after the commencement of one of the specified forms of external administration referred to above.
• The provisions do not (generally) impose a stay or prohibit the exercise of a right for any other reason (e.g. termination for a failure by the company to make required payments or perform some other obligation under the relevant contract).
• While a stay is in force, the relevant contractual counterparty or creditor of the company will not be required to provide additional credit or new advances to the company.
• The new stay rules will only apply to contracts, agreements or arrangements entered into after the commencement date of the stay provisions.  

Author:  Samantha Khoo

If you have any queries about this article, please contact Samantha Khoo (Senior Associate - skhoo@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierralegal.com.au).