Despite volatile global market conditions, growing inflation concerns, ongoing labour shortages and supply chain disruptions, Australia's economy has remained resilient. According to the Australian Bureau of Statistics, the Australian economy grew 0.8% during the March quarter of 2022 and 3.3% over the past year. The Reserve Bank of Australia forecasted, in its Statement on Monetary Policy (May 2022), that "a strong expansion in the Australian economy is underway" by growth in private consumption and investment.

The data from the Australian Banking Association indicates that, out of 2.4 million businesses in Australia, 98% are classified as small and medium enterprises (SME'S) which are private companies.

SME's have long been the lifeblood of the Australian economy but whether they remain as such is questionable, given market competition has become more vigorous and competitive, amid such strong Australian economic growth.

In the long term, what is likely to happen is that eventually only the fittest businesses will survive, with smart market players taking the opportunity to expand and increase their share of the Australian market.

Mergers and Acquisitions - a tool for potential expansion

Mergers and acquisitions (M&A's) allow businesses to have, among others, improved economies of scale, increased market share, higher levels of competition, better access to talent, diversification of risk and faster strategy implementation.

Whether you are a local SME looking for growth or a foreign company looking for expansion into Australia, private M&A (where a target company is a private company) is a tool you may consider using for your prospective expansion.

Private M&A is less regulated and sanctioned than public M&A (where a target company is a public company) in Australia. A private M&A transaction of average complexity will ordinarily run between two to three months. In Australia, private M&As are only governed by the Corporations Act 2001 (Cth), in certain respects.

The rights and obligations, of the parties in a private M&A, are mainly governed by the principles of contract law and are set out in the terms of the share or asset sale agreement entered into between the parties. However, it is not uncommon for private M&A's to be subject to conditions such as Foreign Investment Review Board (FIRB) approval/clearance, Australian Competition and Consumer Commission (ACCC) approval, shareholders or board approvals, third party consents or specific sector regulations. It is also important to consider whether notification, under the Foreign Acquisitions and Takeovers Act 1975 (Cth) of a proposed transaction to avoid consequences of non-compliance, is required.

Structuring a Private Merger and Acquisition

To structure a private M&A, key documents are needed and include the following:

  • a heads of agreement or term sheet setting out the terms on which a more formal sale and purchase agreement will be drafted
  • a sale and purchase agreement setting out details of the sale
  • documents effecting the transfer of shares or assets (and in respect of an asset sale, relevant assignment or novation documents)
  • transitional service agreements (for shared support services post settlement)

Due Diligence

In a private M&A transaction, it is common for a buyer to instigate a due diligence process (both legal and financial) prior to a contract of sale becoming unconditional.

Legal due diligence (usually conducted by the buyer's solicitors) will generally confirm title to the shares in a company or assets in a business, legal structure, terms of material contracts, ownership and use of intellectual property and real property, security interests in personal property, employment entitlements, litigation and bankruptcy status and compliance with relevant laws. Financial due diligence (usually conducted by the buyer's accountants) will generally confirm the historical financial results, current financial positions, the reasonableness of financial forecasts, working capital positions, valuation and taxation implications, financial obligations, and financial and operational risks and opportunities. The scope of each due diligence process is dependent on the size and nature of the target company/business. In larger transactions or sales of highly regulated businesses, sellers may provide sellers' due diligence reports, but buyers are still recommended to conduct their own due diligence process.

Financial Assistance

Whilst the seller and buyer may negotiate on the purchase price, consideration, deposit payment and any earn-outs or escrow arrangements, Section 260A of the Corporations Act 2001 (Cth) prohibits a company from giving financial assistance for the purchase of its shares or the shares of its holding company if that assistance results or would result in materially prejudicing the company, its shareholders or its creditors.

Share Acquisition

For share acquisition in a private M&A, regulatory filing to the Australian Securities and Investments Commission (ASIC) is mandatory and notification to the Australian Taxation Office (ATO) is sometimes required. For both share and business acquisitions in a private M&A, there are usually other notifications relating to operational licences and registrations to be filed with relevant bodies.

Transfer Duty

A transfer of shares (if the target company holds no interest in land) does not give rise to a transfer duty (stamp duty) liability.

A transfer of business assets (with no interest in land) may or may not have transfer duty liability depending on which state/territory in Australia the assets are located in.

However, a transfer of an interest in land is generally a dutiable transfer. The person liable to transfer duty is generally the buyer.

Capital Gains Tax

A seller disposing of its shares or assets may be subject to capital gains tax.

If a foreign resident seller disposes of certain taxable property, the buyer has an obligation to withhold 12.5% of the purchase price and pay it to the ATO. The foreign resident seller must lodge a tax return at the end of the financial year declaring their Australian assessable income, including any capital gain from the disposal of the asset.

A buyer's foreign resident capital gains withholding obligation can be met, by the seller providing to the buyer a clearance certificate issued by the ATO, on or before the settlement.

Goods and Services Tax (GST)

GST, which is currently at the rate of 10%, applies to a sale of assets unless the sale is a supply of a going concern and hence GST-free. GST does not apply to the sale of shares.

Payment of GST amount is the obligation of a seller, and the seller will normally issue a GST tax invoice to the buyer for the buyer to pay them an amount equal to the GST amount.

Transfer Pricing

Transfer pricing needs to be considered if a private M&A transaction is between related parties and one party (either the seller or the buyer) is a non-resident of Australia.

The Australian parties tax implications can be affected if the amounts for the transaction do not comply with the arm's length principle under the transfer pricing rules. A foreign buyer should also note the corporate income tax rate for Australian companies for the tax year 2021-22 is 30% (with a reduced rate of 25% for a base rate entity).

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.