Typical due diligence issues
In Australia, it is customary to finalize the due diligence review of a target before executing the acquisition agreement. The key areas of review in the due diligence process will depend on the deal, but generally include corporate, financial, assets, real estate, intellectual property, IT systems, litigation, employment, liabilities, insurance, compliance and tax matters.
In a share sale transaction, reviewing material contracts (shareholder agreements, customer contracts, leases, banking contracts) for change of control provisions is key.
In asset sales, clauses relating to restrictions on the seller to assign or otherwise transfer their rights or interests in the assets to the buyer are the most relevant.
Based on the due diligence findings, the parties may negotiate special completion conditions and specific indemnities and tailor specific warranties.
Pricing and payment
The payment of deposits is not common practice in Australia, except in the real estate sector.
There are no requirements to carry out a valuation or follow a particular valuation model for determining the purchase price for companies or assets (although a valuation may be required for stamp duty purposes).
In practice, the most commonly used valuation method is completion accounts, with the most prevalent being cash-free and debt-free adjustments. The parties may also agree on an adjustment to the purchase price based on any shortfall or excess of the target's actual working capital against a target working capital. Fixed price agreements are also fairly common, as are net asset valuations.
"Locked-box" mechanisms are not common, other than in seller-friendly private equity deals (typically auctions) to reduce or eliminate the complexity of adjustments. Earn-outs are becoming more common as a means of bridging the gap between the seller's and buyer's views on valuation, allowing the buyer to defer the payment of some of the consideration, conditional on agreed milestones or thresholds being achieved.
The parties will need to agree upon the form of payment, that is, whether it should be a cash payment, a share exchange, a combination of both cash and share exchange, or other valuable consideration.
Electronic transfers of funds (including through the SWIFT Code international system) are the most common way of making cash price payments.
Signing/closing
The shares or assets being sold are formally transferred to the buyer upon closing of the transaction. Usually, the purchase price is paid on closing.
Simultaneous signing and closing is more commonly seen in straightforward deals with minimal conditions involving third parties. However, where it is necessary to obtain regulatory approvals or third-party approvals before closing (e.g., customer consents for change of control), it is common for completion to occur shortly after the satisfaction or waiver of the last condition precedent.
The acquisition agreement will typically provide that on closing, the seller will deliver to the buyer the relevant documents relating to officer appointments and revocation of authorities (for share sales) as well as title documents, and other documents necessary for the buyer to obtain legal title to the shares or assets acquired.
Warranty and indemnity insurance
In recent years, there has been an increase in the uptake of warranty and indemnity (W&I) insurance by corporate and private equity parties in M&A transactions. There are two main types of W&I insurance: a buyer-side policy and a seller-side policy.
The most popular type of W&I insurance is the buyer-side policy, where the buyer is insured for any losses as a result of a breach of warranty (subject to the agreed limitations) given in the sale agreement.
The seller-side policy insures the seller for claims by the buyer with respect to financial loss arising from a breach of warranties given by the seller (subject to the agreed limitations). In the event of a breach of insured warranty, the buyer brings the claim under the sale agreement and the seller makes a claim against the insurance policy.
A W&I policy will usually cover warranties (e.g., title and capacity warranties, general business or operation warranties, and tax warranties) and general indemnities (e.g., tax indemnity covering unknown tax risks) provided under the sale agreement.
In the Australian market, the average premium rates offered by insurers are currently approximately 1.0% to 1.5% of the insured limit.
Foreign investment restrictions
Australia has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.
The foreign investment review regime is not limited to certain sectors. However, there are additional rules for certain sectors that are considered national security sectors or sensitive sectors. For further information, see the more detailed section on "Foreign investment restrictions".
Antitrust/merger control
Notification of a merger in Australia is not mandatory but recommended by the Australian Competition and Consumer Commission (ACCC) when the merging parties' products are substitutes or complements, and the merged firm will have a post-merger market share of more than 20% in relevant markets.
Informal merger clearance can be sought from the ACCC, which provides significant comfort but does not offer protection from legal action. A formal authorization process can grant immunity from legal action, and allows for review of the ACCC's decision. The Foreign Investment Review Board (FIRB) usually requires ACCC merger clearance before granting their own approval.
Parties may be asked to provide an undertaking not to complete the transaction until after the ACCC’s review. For further information, see the more detailed section on "Antitrust/merger control".
Corporate regulator
The Australian Securities and Investments Commission (ASIC) is the Australian corporate regulator. ASIC does not directly regulate private asset or share transactions, but filings need to be lodged with ASIC within 28 days of a change in share capital, ownership or ultimate ownership, address details or director and company secretary details of an Australian company. ASIC becomes more involved in takeover transactions involving Australian publicly listed entities.
Other regulatory or government approvals
Transactions involving certain sectors, such as healthcare, banking, renewables, insurance, financial services and broadcasting, may also involve regulators specific to the industry.
Share sale
In a share sale transaction, the legal entity being acquired continues to employ its staff after completion of the sale. The employment of the employees does not normally end and the terms and conditions of employment do not change, subject to applicable change of control provisions (which are unusual in employment agreements).
Asset sale
In an asset sale, the employees will need to cease employment with the seller and commence employment with the buyer. The buyer will need to make an offer of employment to each employee. Generally, the terms and conditions of employment offered by the buyer need to be comparable or superior to the employees' existing terms and conditions to reduce the risk of the seller being liable for redundancy/termination costs. The offer should be conditional on completion occurring.
Employees cannot be forced to accept the buyer's offer. The seller will need to consider how to deal with employees who do not accept the offer and which party will bear any resulting costs.
Commercial issues to consider include redundancies, retention arrangements and indemnities for any claims made against the target company by employees.
Specialist employment law input is often engaged to review the terms of employment contracts, industrial awards and any rules of any employee share or option schemes or other employee benefit plans and determine the consequences of the sale for participants in those plans.
Income tax
A nonresident is generally assessable to tax on income derived by it from Australian sources and on capital gains made on assets that are "taxable Australian property" (TAP). TAP may include Australian real property, business assets of Australian permanent establishments and non-portfolio interests in entities that hold a majority of assets that, by market value, comprise Australian real property. This position may be modified by the tax treaty in force between the relevant countries.
Foreign resident capital gains withholding tax
The buyer may be required to withhold 12.5% from the purchase price of certain classes of TAP and remit that amount to the Australian Taxation Office (ATO) where the seller is a foreign resident. The asset sale or share sale agreement should be appropriately drafted to deal with this withholding tax.
Transfer pricing issues
Where related parties are counterparties to the transaction and one of the entities is a nonresident, the transfer pricing rules should be considered. Generally, the conditions existing between the parties should be at arm's length.
Thin capitalization
Australia is currently tightening its approach to investment entities funded by high levels of debt (when compared to equity). Some changes are proposed to apply retrospectively from 1 July 2023. The proposed changes would deny debt deductions for entities with debt deductions above AUD2 million based on stricter tests, the default being an "earnings-based" test rather than the current "assets-based" test. The proposals include broad anti-avoidance rules that may deny deductions where related party debt is used to acquire a target and certain other debt deduction creation strategies.
Acquisition structure
The acquisition structure the buyer uses to acquire the shares will influence the tax treatment of the share acquisition for the buyer, and the go forward tax profile of the company acquired. What acquisitions structure is appropriate for the buyer will depend on the profile of the company being acquired, the existing corporate structure of the buyer and the post-acquisition integration plan.
A discussion of the tax treatment of asset acquisitions and share acquisitions is included in the Tax section of this guide.
Stamp duty
The rate of stamp duty and the categories of dutiable property vary between each Australian jurisdiction. The highest effective rates of duty range between 4.5% and 6.5%. Relevant to foreign buyers, surcharge duty rates may also apply in respect of transactions concerning interests in residential land in certain states. Surcharge rates range between approximately 1.5% and 8%, and surcharge duty is payable in addition to the primary duty.
The buyer is generally liable to pay stamp duty (under statute and contractually).
A discussion of the duty treatment of asset acquisitions and share acquisitions is included in the Tax section below.
Goods and Services Tax
Australia has a Goods and Services Tax (GST) which, where applicable, is levied at a rate of 10%. A discussion of the GST treatment of asset acquisitions and share acquisitions is included in the Tax section of this guide.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.