In Short
- Inform the Commerce Commission about your acquisition plans to ensure compliance with competition laws and avoid potential penalties.
- Draft a Share Purchase Agreement (SPA) detailing the terms of the acquisition, including purchase price, representations, warranties, and conditions precedent.
- Review existing contracts, leases, and employment agreements to identify potential risks or obligations that could affect the business post-purchase.
Tips for Businesses
When acquiring a business, ensure compliance with competition laws by informing the Commerce Commission. Draft a detailed Share Purchase Agreement (SPA) outlining key terms, including purchase price and conditions. Review contracts, leases, and employment agreements to uncover any risks. Engaging legal professionals can help navigate the process smoothly and minimise potential issues.
As an aspiring business owner, you may wonder how to enter the corporate world. There are many avenues, from beginning a startup company or acquiring an existing business. A business acquisition may be perfect for you if you prefer to take over an established business and focus on growth. However, you must understand your rights and obligations before purchasing a business to ensure you make an informed decision. This article will explain what is a business acquisition and outline three legal factors to consider during a business acquisition.
What is a Business Acquisition?
A business acquisition occurs when one company purchases most or all of another company's shares to gain control. Hence, once acquired, you can begin making decisions about the new assets without approval from the existing company's shareholders. You can also enjoy:
- economies of scale;
- increased market share; and
- synergies through an acquisition.
Your chosen firm must agree to the acquisition. Therefore, its shareholders and board of directors should approve of the acquisition. Additionally, written approval is recommended to avoid future disputes or legal issues.
1. Conducting Due Diligence
Before beginning your business acquisition, you should conduct due diligence (DD) on your chosen company. DD is the process of investigating a business before proceeding with the purchase. Additionally, DD allows you to analyse the business' pros and cons to ensure acquiring it is the right decision.
Notably, the existing company owner may request you to sign a non-disclosure document to prevent the leakage of confidential business information. Following this, you can review the:
- financial statements;
- company valuation;
- business contracts;
- employment contracts;
- articles of incorporation;
- business plan; and
- legal documents.
You can request the company owner to provide all relevant information in a virtual data room. This can streamline the DD process and increase efficiency.
Due Diligence Guide for Purchasing a NZ Business
This guide will walk you through the due diligence process when purchasing a NZ business.
2. Informing the Commerce CommissionAbout the Acquisition
The Commerce Commission is responsible for overseeing any business mergers and acquisitions. Before acquiring a business, you should inform the Commission of your intentions to avoid legal penalties. The Commerce Commission will then review your potential acquisition and authorise it.
During their review, they will consider whether the potential acquisition will lessen competition in the market. By law, your acquisition cannot substantially lessen competition in the market. The Commission may still authorise the acquisition if it substantially lessens competition in the market while providing a benefit to the public.
3. Drafting a Share Purchase Agreement (SPA)
To buy shares in your target company, you will need to draft a SPA with the help of your corporate lawyer. This will outline critical terms and conditions for the share purchase and helps to minimise future disputes. Additionally, all parties will know their rights and obligations regarding the sale.
Key terms of the SPA include:
- price and payment;
- conditions precedent;
- representations and warranties;
- indemnification;
- termination rights;
- amount of shares you are buying;
- confidentiality; and
- settlement date.
Conditions PrecedentFor the Acquisition
Your conditions precedent clause will outline matters you must meet before the sale continues. Any failure to complete the condition can result in a fallen sale. Therefore, you should ensure the clauses outline a practical timeframe for you or the seller to complete the relevant conditions. Common conditions include:
- regulatory approval for the acquisition;
- delivery of documents such as intellectual property assignments;
- assignment of business contracts; and
- assignment of the property lease.
Indemnification
Another clause to be aware of in your SPA is your indemnification clause. The indemnification clause will specify who bears the liability for losses in case of a warranty breach or misrepresentation. It can outline how claims are made, processes and how payment will be processed.
Additionally, it should detail what the indemnification applies to. For example, because you are buying shares, you may like the clause to apply to covenants and seller liabilities.
You can also include a non-compete provision within the SPA. This will restrict the seller from competing with your newly acquired business until after the settlement date. Often this clause is beneficial when buying all the company shares as it is unlikely the seller will remain with their existing business.
Termination
Your termination clause enables either party to terminate the acquisition before settlement. Accordingly, you should ensure that you detail how to execute the termination by:
- all parties' written consent;
- a party's breach of warranty or representation; or
- failure to complete any of the precedent conditions.
Key Takeaways
Acquiring a business is a significant and complex process. During the process, you should:
- conduct due diligence to make an informed decision;
- inform the Commerce Commission about your acquisition to avoid future penalties; and
- begin drafting your share purchase agreement.
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.
