If you are thinking of buying or selling a business, recent developments in this area of the law provide some valuable lessons to avoid falling into common traps. There are important lessons to be learnt in the areas of avoiding potential cartel-conduct, post deal announcements, excluded assets and documents, warranty insurance and the release of Security Interests from the PPSR.
Here's our list of 5 things anyone buying or selling a business needs to be thinking about right now.
- Know who you're dealing with, and be honest about who you're acting for – bid-rigging and the Cartel provisions
Earlier this year, the Federal Court handed down its decision in Norcast S.ar.L v Bradken Limited (No 2) and set quite a low threshold for establishing liability for bid-rigging under the cartel provisions of the Competition and Consumer Act 2010 (Cth) (CCA).
In 2011 the Swiss ultimate holding company of Norcast Wear Solutions Inc (Norcast) decided to sell the Company, a leading manufacturer of mining consumables. Bradken Limited (Bradken) was Norcast's main competitor, with a previous legal case and Bradken being rebuffed on an earlier attempt to acquire Norcast. As a result, when the sale process began, Bradken assumed that it had been excluded, and it was not contacted directly by the Seller's investment bank, UBS, who was conducting the sale.
Instead, Bradken engaged a US private equity fund, Castle Harlan Inc (CHI) as a consultant to act on its behalf, thinking that if a private equity fund acquired Norcast, Bradken would then have the opportunity to acquire it. Both Bradken and CHI actively concealed Bradken's involvement in the process from Norcast and UBS.
In July 2011, CHI purchased Norcast for US$190 million, and just a few hours later on-sold it to Bradken for US$212.4 million.
When NorcarstS.ar.L, Norcast's parent company, found out about the on-sale by CHI, they commenced proceedings against Bradken claiming a bid-rigging arrangement was in place between Bradken and CHI and that they had suffered loss as a result.
The Federal Court agreed and found in favour of Norcast and awarded damages of US$22.4 million – the difference between the price it received from CHI and the price paid by Bradken to CHI. Two of Bradken's directors, including former NSW Premier Nick Greiner, were also found to be liable.
Lesson: As a seller it is important to ascertain whether your potential buyer is acting on behalf of, or with someone else. Similarly, if you are a potential buyer acting as an agent, or are considering on-selling your new acquisition, care must be taken to avoid falling foul of the cartel provision of the CCA.
- When blowing your own trumpet, make sure you play the right notes – post deal announcements
Buyers are usually very keen to announce a new acquisition, however care must be taken to make sure that post-deal announcements don't also attract unwanted interest.
In October 2012 the buyer in a share sale of 2 Victorian-incorporated companies announced that, as a result of the acquisition, it now had offices in Sydney, Melbourne, Brisbane and Perth.
In July 2013, this attracted the interest of the WA Office of State Revenue with regard to possible duty payable under the Duties Act 2008 (WA). The WA OSR then made a formal request under the Taxation Administration Act 2003 (WA) for details of the transaction and a full copy of the sale documents, including any annexures. The buyer complied with this request, but lost time and incurred significant expense as a result.
Lesson: The lesson to be learnt here is that you should always keep in mind your intended audience, as well as the unintended audience, when announcing and publicising deals.
- Mind the Gap – what assets are included and what assets are excluded
When a business is sold through an asset sale agreement, the normal procedure is for company records and other materials to be "transferred" at Completion by the seller leaving them in situ at the business' premises.
In such transactions, a distinction is drawn between those records which are included in the assets being sold, and those which are excluded. Excluded records are usually those no longer required for the operation of the business at completion – e.g. tax records more than seven years old, expired marketing materials etc.
Following the completion of a recent business sale under an asset sale agreement and after the buyer took possession of the premises and the assets, the seller's personnel attempted to remove a number of items (including several items of a personal nature which had somehow made their way onto the asset register). The buyer became quite paranoid that the seller was removing records which were not defined as Excluded Records, and as a result refused entry to the seller's personnel and boxed all the records up.
The buyer has since commenced proceedings claiming that, since the definition of "Excluded records" did not extend to cover all records other than those specifically stated to be "included" records, many of the items which the Seller was attempting to remove were therefore not excluded records.
Lesson: The first lesson to be learnt here is that care must be taken to ensure that the definitions of which records are included and which are excluded are mutually exclusive, so there is no gap between the two for items to fall.
Secondly, in an asset sale, all excluded items should be removed before the buyer takes possession.
- Getting the right fit – warranty insurance
Lately, we have seen an increased preference for parties to take out insurance in relation to potential breaches of the warranties in a sale agreement, and many buyers are obtaining their own warranty insurance, rather than requiring the seller to take it out.
An advantage of a buyer's side policy is that the buyer can claim against the insurance directly in relation to any loss, rather than being required to first notify the seller and have them notify the insurer and make a claim. This can lead to reduced costs and expedited recovery of any insurance monies.
However, care must be taken as there is a natural conflict which arises between the interests of the buyer and the insurer. The buyer will want the warranties to have a broad scope to ensure it obtains the maximum comfort and protection; while the insurer will want to narrow the scope of the warranties to minimise its risk.
Lesson: The lesson to be learnt is that warranty insurance is not "one size fits all" and must be tailored to the needs of the parties.
- A false sense of Security? – Personal Property Securities Act 2009
Prior to the operation of the Personal Property Securities Act 2009 (Cth), a standard form was used to secure the release of a charge over a seller's assets. Usually, the holder of a charge received a bank cheque in satisfaction of any debt owed to it by the seller, and in exchange gave over a signed ASIC Form 312 Notification of Discharge or Release of Property from a Charge. The buyer, seller or incoming lender could then file the Form 312 with ASIC and ensure the discharge or release themselves.
However, under the PPSA, there is no standard form to be used, and it is the responsibility of the Secured Party to register a Financing Change Statement with the Personal Property Securities Register to release the Grantor from a Security Interest.
As a result, we are seeing Secured Parties adopting their own individual documentation, usually an undertaking to register a Financing Change Statement within a certain period of time. Such undertakings are diverse, both in terms of their form and also in the time period offered, usually anywhere between 14-30 days.
However, once the Secured Party has been paid out, the main incentive for it to swiftly release the Security Interest has been removed. As a result the buyer is often required to be vigilant, at its own expense, in following up the Secured Party to ensure that it can take full, unencumbered possession of any secured property.
Lesson: The lesson to be learnt from this is that potential buyers should incentivise the seller to assist in ensuring any Security Interests are released in a timely manner.
Our corporate team at Swaab is well placed to apply these lessons and advise you on how best to avoid these pitfalls when buying or selling a business.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.