Navigating the Australian Foreign Direct Investment (FDI) landscape can be complex, especially with the regulatory oversight of the Foreign Investment Review Board (FIRB).  In this blog post, we'll delve into the FIRB approval process and highlight the key considerations for foreign investors looking to invest in Australia.

Understanding Australian FDI and FIRB

Australian FDI refers to the investment made by foreign entities into Australian businesses and assets.  The Australian government regulates FDI through FIRB, which evaluates foreign investment proposals to ensure they align with national interests.  Understanding FIRB's guidelines, thresholds and approval processes is essential for foreign investors.  Significant criminal and civil penalties can apply for non-compliance.

Key Steps in the FIRB Approval Process

The process of gaining FIRB approval is summarised below.

1. Application Submission: Foreign investors must submit a comprehensive application to FIRB detailing the nature of the investment, the parties involved, and the expected benefits to Australia.  Fees are imposed for application consideration.
2. Review and Consultation: FIRB assesses each application on a case-by-case basis, considering factors such as the investor's background, the economic benefits of the investment and any potential national security implications.  Consultation with government departments, agencies, and industry stakeholders may occur during the review process.
3. Decision and Conditions: Once the review is complete, FIRB will make a decision on whether to approve, conditionally approve, or reject the investment proposal.  In some cases, FIRB may impose conditions on approved investments to mitigate risks or ensure compliance with regulatory requirements.
4. Post-Approval Obligations: After receiving FIRB approval, investors must continue to comply with reporting obligations, including providing updates on the progress of the investment and any material changes to the original proposal.  

Key Considerations for Foreign Investors

Before diving into the Australian market, foreign investors must familiarise themselves with the following key considerations:

1. Monetary Thresholds: Understanding the monetary thresholds applicable to different types of investments is crucial for determining whether FIRB approval is required.  A list of different investment types and monetary thresholds is available on the 'Foreign investment in Australia' website here.
2. Sectoral Regulations: Certain sectors, such as critical infrastructure, healthcare, and sensitive land, are subject to stricter regulations and scrutiny by FIRB.  Foreign investors must assess sector-specific regulations and compliance obligations before making investment decisions.
3. Due Diligence: Conducting thorough due diligence is paramount to mitigate risks and ensure the success of investment ventures.  From legal, tax and financial analysis to market research and risk assessment, comprehensive due diligence enables foreign investors to make informed investment decisions.

Conclusion

Navigating the complexities of Australian FDI and FIRB requires strategic guidance and legal expertise. Sierra Legal can provide foreign investors with comprehensive legal support throughout the investment lifecycle, including assistance with the establishment of appropriate investment vehicles, drafting and negotiating agreements in relation to the investment, and advising on and obtaining any necessary FIRB approvals.  Get in touch with one of our team members today.

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The Federal Government is poised to revamp the ‘sophisticated investor’ regime.  This blog will explore the existing sophisticated investor test, analyse the proposed changes, and assess the potential implications of these alterations on the investment landscape for both investors and corporations.

Understanding the current regime

In Australia, the term ‘sophisticated investor’ is defined under the Corporations Act 2001 (Cth) and carries specific financial and regulatory implications.   Individuals or entities meeting specific financial criteria, such as a certified net asset value of at least $2.5 million (including the family home) or a gross income of $250,000 per annum for the last two years, gain access to a broader spectrum of financial products and investment opportunities that may not be available to retail investors.

While this status opens doors to potentially lucrative investments like private equity, venture capital, early-stage startups and unlisted real estate, it also entails forgoing certain consumer protections.  Sophisticated investors are deemed capable of navigating higher-risk activities, such as buying shares without a prospectus, and are subject to different regulatory considerations compared to their retail counterparts.

What are the proposed changes?

The proposed adjustments to the sophisticated investor regime are geared towards refining the criteria for determining eligibility.  These proposed changes include:

1. Increased financial thresholds:  the modifications may involve raising the financial thresholds that individuals or entities must meet to qualify as sophisticated investors. This would necessitate a higher level of income or assets, ensuring that access to certain investment opportunities is reserved for those with substantial financial capacity. While a definitive threshold is yet to be determined, industry experts, drawing on inflation data, suggest that a suitable benchmark for the revised sophisticated investor criterion could fall within the range of $4.5 million to $5 million (for the net asset test).
2. Periodic reassessment: another notable change may involve the introduction of a periodic reassessment requirement. Investors would be obligated to consistently meet the sophistication criteria over time, adapting to evolving market conditions and individual circumstances.

Why the changes?

The drive behind these changes stems from the aim to enhance investor protection and adapt to the ever-changing financial landscape.  Concerns within the Federal Government have emerged due to the static nature of the test thresholds, which were established in 2001.  The lack of adjustment has resulted in a significant surge in the percentage of Australians meeting the criteria for sophisticated investors, escalating from a mere 1.9% in 2002 to over 16% in 2021.  This notable increase is primarily attributed to the rapid appreciation of family home prices, facilitating the qualification of smaller investors who may be averse to substantial losses as sophisticated investors.

Potential implications for investors

The suggested alterations to the sophisticated investor regime may carry substantial consequences and potential impacts for investors, such as:

1. Reduced access to investments: increased financial thresholds may limit the number of individuals and entities qualifying as sophisticated investors, leading to reduced access to certain investment opportunities.
2. Adaptation of investment strategies: investors may need to adapt their investment strategies in response to changes in eligibility criteria.  This may involve reassessing risk tolerance, exploring new investment avenues, or seeking alternative financial products.

Potential implications for corporations

A more stringent sophisticated investor test may result in a decline in the number of individuals and entities meeting the criteria, carrying significant implications for corporations, including:

1. Altered investor landscape: this may bring about a shift in the investor landscape, potentially impacting funding strategies and investor relations.  A reduced pool of sophisticated investors could reshape the composition of corporations' investor bases.
2. Impact on capital raising: corporations might encounter challenges in attracting funds if financial thresholds are heightened, affecting the ease with which they can raise capital from a narrowed pool of eligible investors.

In response to these potential changes, corporate entities are advised to proactively adjust their strategies.  Staying informed about regulatory developments, seeking advice from legal and financial experts, and reevaluating investor outreach strategies are essential for navigating the evolving landscape.  As regulations evolve, diversifying investment strategies and considering a broader range of potential investors, both sophisticated and retail, may help mitigate the effects of any alterations to the sophisticated investor test.

Conclusion

Stay tuned for further updates on the sophisticated investor regime.  If you have any questions or would like to discuss these developments further, please don't hesitate to reach out to the Sierra Legal team.

The Personal Property Securities Act 2009 (Cth) (‘PPSA’) is set to undergo a significant transformation.  This blog delves into the PPSA, the proposed changes, and why businesses should pay attention and prepare for the impending changes.

What is the PPSA?

The PPSA is a comprehensive legal framework that governs the registration and management of security interests in personal property. It was introduced to simplify and standardise the process of securing assets, reducing disputes and enhancing transparency in transactions.

What is the PPSR?

The Personal Property Securities Register (‘PPSR’) is the online platform where these security interests are registered and searched. It acts as a centralised database, allowing businesses and individuals to record their security interests and conduct searches to determine if another person or entity has existing security interests registered against it.

Statutory review of the PPSA

On 22 September 2023, the Australian Government invited public consultation on its response to the 2015 statutory review of the PPSA (‘Whittaker Review’).  The Whittaker Review made 394 recommendations to reduce complexity and allow the PPSA to better meet its objectives.  Of the 394 recommendations, the Government has proposed to accept (in whole or in part) 345 recommendations.

What’s changing?

The proposed reforms are designed to assist small business, financiers and consumers by simplifying processes, reducing risks and costs, and increasing usability of the PPSR.  The exposure draft of the amending legislation and regulations, and other consultation materials, are available here.

Some of the proposed changes to the PPSA include:

• Chattel paper: removing the concept of ‘chattel paper’ from the PPSA.
• PPS lease: amending the concept of a ‘PPS lease’ to remove all references to ‘bailment’.
• Negotiable instrument: deleting the definition of ‘negotiable instrument’, allowing the term to have the same meaning as at general law.
• Motor vehicle: modifying the definition of ‘motor vehicle’ to mean that a vehicle is a motor vehicle if it has a vehicle identification number.  
• Intermediated securities and investment instruments: amending the definitions of ‘intermediated securities’ and ‘investment instruments’ and the rules relating to how security interests over such personal property can be perfected by control.
• PSMI: providing that a sale and lease-back can give rise to a PMSI if (and to the extent that) the PMSI secured party paid the purchase price for the collateral directly to the supplier.
• Chapter 4: replacing the enforcement rules set out in Chapter 4 with a clearer security interest enforcement regime.
• Accounts financer: allowing an accounts financier to be able to use the process in section 64 of the PPSA to take priority over both a PMSI held by an inventory financier in the proceeds of inventory, and over a non-PMSI security interest held by the same inventory financier in those proceeds.
• PPS Registrar: expanding the Registrar’s power to conduct investigations to investigations that are conducted for purposes that may include pursuing the enforcement of civil penalties.

Some of the key changes to the PPSR registration process include:

• Number of collateral classes: simplifying the collateral classes to 6 classes: serial-numbered property (with appropriate sub-classes for the different types of serial-numbered property), other goods, accounts, other intangible property, all present and after-acquired property, and all present and after-acquired property except.
• Registrations over trust assets: changing the registration of security interests over trust assets so that registration can be made against the relevant details for the trustee, rather than trust ABN or other identifying details for the trust.  
• Consumer and commercial property: removing the requirement to indicate whether the collateral is consumer property or commercial property.
• Single registration for multiple collateral classes: allowing a single registration to be made against a number of collateral classes (subject to certain exceptions).
• PMSI: providing a uniform timeframe of 15 business days for a registration that perfects a PMSI for all types of collateral, including inventory.
• Registration terms: all registrations against individuals, or against serial-numbered property that may not identify the grantor because the grantor is an individual, will have a maximum term of 7 years.
• Registrations against individuals: introducing an obligation on secured parties to remove registrations made against individuals within 5 business days after the secured party becomes aware, or should reasonably have become aware, that it no longer has any security interest over any collateral.

What’s next?

The Government is seeking input on the proposed reforms to assess whether they will meet the needs of lenders, consumers and businesses. The submission period opened on 22 September 2023 and is scheduled to close on 17 November 2023.

These suggested reforms might require adjustments to contracts, documents, IT systems, and business practices. Secured parties should carefully evaluate the potential impact on their current registrations, security interests, and overall business operations as they move forward.

Stay tuned for further updates on the PPSA.  Contact the Sierra Legal team today to discuss how the reforms will affect your business.

Australia’s unfair contract terms (UCT) regime is designed to protect consumers and small businesses from unfair contract terms in certain 'standard form’ contracts.  

On 9 November 2023 significant changes to the UCT regime will take effect and, among other things, the range of contracts that fall within the operation of the regime under the Australian Consumer Law and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) will be expanded.

Notably, the changes include broadening what constitutes a small business contract.  Under the Australian Consumer Law, the UCT regime may apply to standard form business contracts where one party to the contract:

• employs fewer than 100 persons; and/or
• has a turnover of less than $10 million for the last income year that ended before or at the time the contract is made.

Similar changes will apply under the ASIC Act, although there is an additional requirement for the upfront price payable under the relevant contract to be $5million or less (excluding interest).

Further, Courts will have additional powers in relation to contracts that contain unfair terms under the UCT regime, including the ability to impose significant financial penalties.  For example, companies that breach the UCT regime under the Australian Consumer Law could incur a maximum financial penalty that is the greater of:

• $50 million;
• three times the value of the benefit obtained from the breach; and
• if the value of the benefit cannot be determined, 30% of the company’s (adjusted) turnover during the period the breach occurred (with a minimum of 12 months).

If your business uses standard form consumer contracts or small business contracts, now is the time to act.

If you need assistance to ensure your business complies with the UCT regime, please call Sierra Legal.

Whether it's due to internal restructuring or meeting commercial requirements like a business sale, many companies encounter the need to transfer contracts from one entity to another. However, it's important to note that this process is not as simple as replacing one party's name with another. In most cases, contracts can be legally transferred through one of two methods: assignment or novation.

Assignment:

An assignment of a contract involves transferring the rights (but not the obligations) of the outgoing party to the incoming party. Typically, an assignment doesn't require the consent or agreement of the other party involved in the contract (the continuing party), unless specifically stated in the terms of the relevant contract.

To effect an assignment, a deed is often executed by both the outgoing party and the incoming party. If the consent of the continuing party is necessary, it is usually convenient to include this consent in the deed and have the continuing party execute it as well.

An assignment does not relieve the outgoing party of its ongoing obligations to the continuing party under the contract. In order to protect the outgoing party against future breaches of contract by the incoming party, it is common for the assignment deed to include provisions where the incoming party:

• promises to the outgoing party that it will fulfil the outgoing party's contractual obligations after the assignment date; and
• provides indemnification to the outgoing party against any claims made by the continuing party for any failures by the incoming party to fulfil those obligations after the assignment.

Even if the consent of the continuing party is not required, for the assignment to have legal effect written notice of the assignment must be given to the continuing party. This written notice ensures that all parties involved are informed about the transfer.

Novation:

Another method to transfer contracts is through novation. In legal terms, novation refers to the substitution of a new contract for an existing one, maintaining the same terms as the original contract, but between the continuing party and the incoming party instead of between the continuing party and the outgoing party. Unlike assignment, a novation transfers both the rights and obligations under the relevant contract from the outgoing party to the incoming party.

In practice, novation is commonly achieved by substituting the outgoing party with the incoming party. This means that, from the effective date of the novation, the incoming party assumes all the rights and obligations previously held by the outgoing party, and the continuing party releases the outgoing party from any further obligations under the contract.

It is important to note that the agreement of the continuing party is always required for a novation to be legally effective. While novation offers certain advantages over an assignment, such as a better legal liability position for the outgoing party, it can be more challenging to accomplish due to the necessity of securing the continuing party's agreement.

Similar to assignment, novation typically involves executing a deed of novation, which states the agreement of all parties to substitute the outgoing party with the incoming party.

Other methods:

In addition to novation and assignment, there are indirect methods available for transferring rights and obligations under a contract. For example, where a party to a contract is a company, it may be possible to transfer the company's rights and obligations under a contract by the shareholders of that company transferring their shares in the company to a third party. By doing so, the company remains a party to the contract, eliminating the need for assignment or novation. Instead, a new shareholder obtains control of the company and indirectly obtains the benefit of the rights, and the burden of the obligations, of the company under the contract.

Choosing the right transfer method

When faced with the need to transfer a contract, whether through assignment, novation, or an indirect method, it is important to consider several factors to determine the best option for your specific situation, including:

• The terms of the contract itself – examine the terms to identify any provisions that prohibit, allow, or impose conditions on the transfer of the contract. Understanding these contractual provisions will help determine the available options and any limitations associated with each method.
• Consider your ultimate goal in transferring the contract - evaluate which party should bear the responsibility for liability arising under the contract, both before and after the transfer. This assessment will help clarify which method of transfer aligns better with your desired outcomes.
• The commercial position of the parties - consider the commercial positions of the outgoing party, the continuing party, and the incoming party. Assess factors such as the willingness of the continuing party to provide consent for the transfer. Understanding the potential challenges or cooperation you may encounter from the relevant parties will assist in selecting the most viable transfer method.

By carefully evaluating these factors, you can make an informed decision on the most suitable transfer method for your specific circumstances.

For more information and to navigate the transfer process smoothly, please contact any member of the Sierra Legal team, whose contact details can be found here (Link).

When entering into a contract, it is essential to be well-informed about the identity of the other party. Both you and the counterparty will have responsibilities and obligations under the contract, such as providing goods or services, or making payments, or both. Ensuring that you are contracting with a legal entity or “legal person” will mean that you can sue them if they breach the contract. Likewise, it is important to be aware of those who have the ability to take legal action against you.

Here, we provide some tips to help you navigate the complexities of contracting with various types of legal entities.

Tip 1: Always contract with a legal entity

You should only enter into a contract with a legal entity (or ‘legal person’), being one that can, under the law, sue and be sued. For example:

• Individuals and companies - both are legally recognised entities capable of entering into contracts. When contracting with an individual or a company, it is essential to clearly identify the party’s legal name and their capacity to act.
• Trusts - although not legal entities themselves, trusts will have trustees that are. Therefore, when dealing with a trust, the contracting party should be the trustee, whether it is an individual or a company. In the contract, the trustee can be identified as “ABC Pty Ltd as trustee of the XYZ Trust” or simply as “ABC Pty Ltd”.  A company quoting an ABN where the last 9 digits of the ABN are different from its ACN may indicate that it is acting as the trustee of a trust (the ABN may be that of a trust).
• Partnerships - unlike individuals and companies, a partnership is not a legal entity separate from its partners. Therefore, all the partners would be parties to the contract. However, in the case of a large partnership, it may not be practical to name each partner as a party to the contract. Instead, because each partner is treated under the law as an agent of the partnership and the other partners for partnership business purposes, any partner, acting as an agent, can enter into the contract on behalf of the partnership. In some instances, a partnership may have a “nominee company” that is owned or controlled by the partners. This separate legal entity serves as a vehicle for entering into contracts on behalf of the partnership. The nominee company can sign the contract as an agent, nominee, or on behalf of the partnership.

Tip 2: Contract with the right party

Apart from ensuring that the other party is a legal entity, it is vital to confirm that you are contracting with the intended party. Mistakenly entering into a contract with the wrong party can lead to complications and difficulties, particularly in cases involving businesses operated through different entities. For instance, if an individual operates a business through a company, and you are a customer or supplier of the business, any contract with the business should be entered into by the company (as the supplier of goods or services, or your customer, as applicable), and not the associated individual (who may be a director or shareholder of the company). Contracting with the individual in this example could give rise to complications, such as if you needed to make a claim for defective goods or services supplied, or a claim for money owed to you, under the contract.  

To safeguard your rights, it is good practice to:

• gather Information - before finalising the contract, enquire about the structure of the business of the other party. This will help you correctly identify the appropriate party with whom to enter into the contract. Questions to ask would include whether the counterparty’s business is operated through a company, trust, or another type of entity; and
• conduct research - utilise online resources to identify and verify the legal entity you are dealing with. This could include conducting searches of ASIC’s database for company and business name information, using the Australian Business Register for ABN searches, running searches of the applicable domain name registry, and checking registered trademarks through IP Australia. These searches can provide valuable insights into the legal entity with whom you are dealing.

Tip 3: Confirm authority to contract

While verifying a party’s authority to enter into a contract may not be necessary where they are an individual or a company, it becomes crucial when dealing with trusts or partnerships, particularly in high-value or high-risk contracts. Consider taking the following steps:

• Trusts: If an individual or a company is contracting with you as the trustee of a trust, you can request a copy of the trust deed to verify their power or authority to contract in that capacity. This verification is essential to ensure that the trust’s assets will be available to fulfil the party’s contractual obligations and any future claims you may have against them.
• Partnerships: When entering into a contract with a person on behalf of a partnership, it may be necessary to obtain evidence of their partnership status. This can be achieved by requesting a copy of the partnership deed or a document appointing them as a partner. Alternatively, you can ask for a power of attorney, or a similar document signed by all partners, authorising the person (or nominee company, if applicable) to enter into contracts on behalf of the partnership.

By verifying that the counterparty is a duly recognised legal entity, possesses the necessary authority to act and meets your satisfaction as the intended contracting party, you can mitigate risks, protect your interests, and establish a solid foundation for successful contractual relationships. For more information or to seek specific advice tailored to your unique circumstances, please contact any member of the Sierra Legal team, whose contact details can be found here (LINK).

Changes to the unfair contracting provisions of the Competition and Consumer Act 2010 (Cth) (CCA) and the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) are due to take effect from 9 November 2023. The changes:

• expand the type of contracts that may be subject to the CCA and ASIC Act; and
• apply significant penalties for noncompliance.

Ahead of the changes taking effect, Australian businesses, including those that were previously unaffected by the unfair contracts regime, should review their standard form contracts to ensure they do not contain any unfair contract terms.

What is an unfair contract term?

A term of a standard form consumer or small business contract may be unfair if it:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (financial or otherwise) to a party if it were to be applied or relied on.

Whether a contract term is ‘unfair’ depends on the particular circumstances of that contract and ultimately can only be determined by a Court.  However, guidance can be obtained from examples given by the ACCC and applicable case law. Terms which could be ‘unfair’ include:

• automatic renewals of contracts without notice or where the automatic renewal period is excessively long
• where indemnities only apply to one party and not to the other party
• where a party has a right to update terms (including varying the fees) without providing prior notice to the other party
• unilateral rights to suspend performance of a contract without notice
• requirements for pre-payment with no ability to get a refund for unused services/products
• a term that permits one party (but not the other) to terminate the contract for convenience
• excessive early termination charges or other ‘exit fees’
• low liability caps (e.g. limiting liability to fees paid where minimal fees are paid upfront)
• a term that penalises one party (but not the other) for a breach or termination of the contract.

What are the changes to the unfair contract terms regime?

The changes to the unfair contracts regime offer increased protections for consumers and small businesses, and include:

1. Prohibition on unfair contract terms

Previously, if a Court found a relevant contract term ‘unfair’ the Court could deem that term void and unenforceable. Under the new regime:

• The proposal, use or application of, or reliance on, unfair contract terms is prohibited.  
• A Court may impose pecuniary penalties for breaches, noting that each unfair term contained in a contract could be considered a separate breach.

2. Small business contracts

The new regime will apply to a contract if one party to the contract is a ‘small business’.  The definition of ‘small business’ has been expanded to be one that:

• employs less than 100 people (increased from the previous threshold of 20 people); or
• had an annual turnover of less than $10 million in the preceding income year (new).

In circumstances where the ASIC Act applies (i.e. in relation to financial products and services) there is an additional requirement that the upfront price payable under the contract does not exceed $5 million (increased from $1 million) .

3. Standard form contracts

A contract may be determined to be a ‘standard form contract’ despite there being an opportunity for a party to negotiate minor changes to the contract or to select a term from a range of options provided.  

4. Court powers

Increased penalties were introduced in November 2022 for breaches of the CCA and those penalties will apply to the new unfair contract terms regime.  For individuals, the maximum penalty that may be imposed by a Court is $2.5 million and for companies, the maximum penalty is the greater of:

• $50 million;
• three times the value of the benefit obtained and reasonably attributable to the breach, if that can be determined; and
• if the value of the benefit cannot be determined, 30% of the company’s adjusted turnover during the breach turnover period (i.e. over the period the breach occurred, with a minimum of 12 months).

In addition to these penalties, the Court will have additional powers, including to:

• make orders it considers appropriate to redress loss or damage that has been caused or to prevent or reduce loss or damage that is likely to be caused by an unfair contract term;
• make orders with respect to the whole contract and not just the void term if necessary to prevent loss or damage; and
• prevent a person from applying or relying on an unfair contract term in an existing contract, or making future contracts that rely on an unfair term.

The expanded unfair contracts regime will apply to standard form consumer contracts and small business contracts: (i) entered into from 9 November 2023; or (ii) renewed or varied from 9 November 2023.

What does your business need to do?

The changes broaden the scope of contracts that will fall within the revised unfair contract terms regime and can result in significant financial penalties for businesses.  It is likely that the Australian Competition and Consumer Commission (ACCC) will be prioritising enforcement of the new regime and will be active in commencing proceedings against businesses who have not complied with their obligations.

Your business should carefully review its standard form contracts with small businesses and consumers for terms that are potentially unfair.  As part of this review your business should identify, and ensure it has systems in place to continue to identify, all commercial partners who may fall within the new definition of ‘small business’.  

If you need assistance reviewing your contracts and ensuring compliance with the updated unfair contracts regime, please call Sierra Legal.

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Selling a business can be a significant undertaking, requiring careful planning and execution. To improve the chances of a successful sale it is essential to present your business to potential buyers in the best possible light. Over the next few weeks, we will share some of the key factors you should consider if you are thinking of selling your business. Addressing these considerations can maximize the sale potential of your business.

Contracts and Agreements

It is important to evaluate contracts and agreements associated with your business. Identify key contracts, such as customer agreements, supplier contracts, leases, and employment agreements.  Evaluate the ability to transfer or assign these agreements, including whether consent will be required from the other parties to the agreement.  Ensure that key contracts have been properly dated, executed, and have not expired.  Be sure to address any issues with respect to the contracts proactively to avoid complications during the sale process.

Organise Your Financial Records

Before initiating the sale process, it is imperative to review and organise your financial records. Buyers will closely scrutinize your financial statements to evaluate the profitability and sustainability of your business. Ensure financial records, including income statements, balance sheets, tax returns, and cash flow statements, are accurate, up-to-date, and well-documented. Consider engaging an accountant or financial advisor to assist you in preparing these records to demonstrate the full potential of your business.

Intellectual Property Protection

Protecting your intellectual property rights is crucial when selling a business. Conduct an audit of your IP assets, including trademarks, copyrights, patents, trade secrets, and proprietary technologies. Verify that all necessary registrations are in place and up to date. Ensure that your IP is adequately protected through confidentiality agreements, non-disclosure agreements, and non-compete clauses. Review existing IP assignments and licences to verify their transferability and identify any restrictions or obligations. Demonstrating a strong and protected IP portfolio will enhance the perceived value of your business to potential buyers.

Compliance with Laws and Regulations

Before selling your business, ensure that your operations are fully compliant with relevant laws and regulations. Conduct a thorough review of your business practices, licenses, permits, and regulatory obligations to identify any non-compliance issues. Rectify any deficiencies and ensure that any relevant licences and permits can be transferred to the new owner. Demonstrating a commitment to legal compliance will instil confidence in potential buyers and minimize potential legal risks associated with the acquisition.

Employee Matters and Employment Contracts

Evaluate your employee matters to ensure compliance with employment laws and regulations. Review employee contracts, confidentiality agreements, non-compete clauses, and any agreements that may impact the transferability of employees. Assess any potential labour disputes, outstanding employee claims, or pending litigation that may affect a sale of the business.  Ensure that key employees are satisfied and engaged, as their departure during the sales process could adversely affect the value of your business.  Open communication and preparation will promote a smoother transition and maintain employee trust and morale.

Lease and Real Estate Matters

If your business operates from a leased property, review your lease agreement to determine its transferability. Identify any restrictions or conditions related to lease assignment and prepare to obtain the necessary consents from the landlord. If you own the property, a property lawyer should be engaged to ensure the smooth transfer of ownership and address any potential encumbrances or title issues. Resolving lease or real estate matters upfront will mitigate complications during the sale process.

Data Privacy and Protection

In an increasingly digital world, data privacy and protection have become critical concerns. Evaluate your business's data protection practices and ensure compliance with relevant privacy laws, such as the Australian Privacy Principles (APPs). Identify and address any potential data breaches or vulnerabilities to protect the privacy rights of your customers, suppliers and employees. Demonstrating a robust data protection framework will enhance the reputation of, and trust in, your business.

Due Diligence and Disclosures

Prepare for the due diligence process by compiling essential documents and information that buyers may request. Be transparent and forthcoming with disclosures to potential buyers, providing them with accurate and complete information about the business. Conduct your own due diligence on the buyer to ensure their credibility and ability to complete the transaction. Engage legal professionals to guide you through the due diligence process and assist in identifying and addressing any legal or financial issues that may arise. By conducting thorough due diligence and making proper disclosures, you can build trust with potential buyers and minimize the risk of post-sale disputes or liabilities.

Conclusion

Selling a business requires careful preparation and attention to detail. By considering the key factors mentioned above, you can position your business in the best possible light for potential buyers. Seeking advice from professionals experienced in business sales will further increase your chances of a successful and profitable transaction.  

Please contact the Sierra Legal Team if you require further information about this topic or assistance with the sale of your business.

In the realm of business, a shareholders agreement serves as a crucial compass regulating the relationship between a company and its shareholders and the management of the company and its affairs.  Yet, the misconception lingers that this agreement is a mere formality, a quick-fill template. In truth, the creation of a valuable shareholders agreement demands meticulous deliberation and purposeful tailoring. While certain issues and themes may be ubiquitous, no two agreements are likely to address them all in the same way.

The nature of the issues to be dealt with in a shareholders agreement (and how they are addressed) will depend on factors such as:

• the purpose, size, and nature of the company and its business;
• the extent to which shareholders are to have the right to be represented on the board of the company, and to control or influence decisions with respect to its business; and
• whether particular shareholders (either personally, or while they hold a specified percentage of shares) have reserved or special rights, such as the right to veto particular decisions or to drive a sale of all of the shares or the business of the company.

As an example, in the case of a company which has 2 or 3 equal shareholders who work in the business, the following are likely to be paramount considerations in the drafting of a shareholders agreement:•

• the need to ensure that all shareholders have an equal say in the running of the company (eg, by each shareholder having the right to appoint their nominee as a director of the company);
• how any deadlocks in decision-making will be resolved;
• what is to happen when a shareholder wishes to sell their shares in the company; and
• how the death and/or total and permanent disablement of a shareholder (or their associated person) is to be handled.

By contrast, the key issues to be addressed in a shareholders’ agreement for a company that has a broader and more varied shareholder base will be different and potentially more complex.  Such a company may, for instance, have a founding shareholder or shareholders, shareholders who are professional investors (such as private equity and institutional investors), and/or employee shareholders, with different shareholdings.  The key issues for a shareholders agreement for this kind of company may include:

• shareholders’ rights to appoint nominees to the board of the company, which may be contingent on a shareholder holding a minimum percentage of shares;
• whether material decisions will require the approval of a specified majority of directors or shareholders;
• whether ‘tag along’ rights are to be conferred on shareholders.  Generally speaking, a ‘tag along’ right is triggered where a majority shareholder (or group of shareholders holding a specified majority of shares) receives a third party offer to buy their shares which they wish to accept.  The inclusion of ‘tag along’ rights in the shareholders agreement mean that the majority shareholder will only be able sell their shares to the third party if they arrange for the third party to make a similar offer to buy the shares held by all of the other shareholders;
• if ‘drag along’ obligations should be imposed on shareholders - where a majority shareholder wishes to accept a third party offer to buy their shares, drag along obligations can force other shareholders to also sell their shares to the third party, at the same price and on the same terms; and
• what type of exit mechanisms should be included – exit mechanisms typically allow a majority shareholder (or group of shareholders holding a specified majority) to require the company (and, where applicable, all shareholders) to undertake a sale of the company’s business or shares, or an initial public offering and listing of the shares on ASX or another securities exchange.

To prepare a relevant and workable shareholders agreement, it is necessary to consider the particular circumstances of the relevant company, its shareholders, and their needs.  For a company with a small shareholder base, the shareholders agreement may focus on fundamental rights and protections that apply to all shareholders equally. With a complex or large business, and/or shareholders with different holdings of shares and different interests, it becomes critical to identify and address the objectives of particular shareholders, their needs in terms of the degree of control they wish to have over the company, and the nature of any special or reserved rights they may require.  

In the course of drafting a shareholders agreement, there are likely to be negotiations between shareholders (particularly where there are majority and minority shareholders), so that a balance (or compromise) is reached. A lawyer who is experienced in drafting and negotiating shareholders agreements will be able to identify key issues relevant to the company in question, and should be able to propose options for addressing those issues in the agreement.

The specific provisions and issues to be addressed in a shareholders agreement will always depend on the unique circumstances and objectives of the company and its shareholders. All of this goes to show that the oft-repeated line that ‘a shareholders agreement is just a standard document’ is really just a myth.

If you need a shareholders agreement prepared for your company, or advice on one, please contact the Sierra Legal team.

Earn-out arrangements are commonly used in mergers and acquisitions to bridge gaps between buyer and seller valuations of a target business. Under an earn-out arrangement, a portion of the purchase price (usually calculated as a percentage of future earnings) is deferred and contingent on the business meeting certain predetermined performance targets.

The use of earn-out arrangements can benefit both buyers and sellers. The seller can potentially receive a higher purchase price if the business performs well in the future, while the buyer is provided with some protection against overpaying for a business that may not perform as expected. Earn-outs can, however, be complex and require careful negotiation and drafting to ensure the terms are clear and enforceable.

In this article, we look at the basics of earn-out arrangements,  their advantages and disadvantages, and our top tips for negotiating and documenting earn-out arrangements.

What are earn-out arrangements?

An earn-out is a contractual arrangement under which the buyer agrees to pay a portion of the purchase price for a business to the seller at a later date, if certain agreed-upon targets are met. Earn-outs typically take place over a period of one to three years and can be based on financial metrics (such as revenue, EBITDA, or net income) or other performance indicators (such as customer growth or product development).

Why use earn-out arrangements?

There are several reasons why buyers and sellers might choose to use earn-out arrangements in an M&A transaction:

Addressing valuation disagreements

In an uncertain economic environment, earn-out arrangements can help bridge the ‘valuation gap’ between the buyer and the seller regarding the value of the business. If the buyer and the seller have different expectations about the future growth potential of a business, the buyer may be hesitant to pay the full asking price upfront. By agreeing on future performance targets, the parties can set a baseline for what they expect the business to be worth and negotiate payment terms based on that expectation.

Mitigating risk

When a buyer acquires a business, their valuation of it will be based on certain assumptions about future earnings potential and growth prospects. These assumptions are derived from the information available at the time of the acquisition. There is inherent uncertainty associated with these projections, so the actual performance of the business may differ from what was originally expected.

Utilising an earn-out arrangement, the buyer can mitigate some of this risk by linking a portion of the purchase price to the future performance of the business.  If the business performs well after the acquisition, the buyer will be required to pay the earn-out to the seller.  However, if the business does not perform as expected, the buyer may not have to pay the earn-out or may only be required to pay a reduced amount. In this way, earn-outs enable the buyer and seller to share some of the risk associated with the acquisition.

Aligning incentives

Earn-out arrangements can also help align the incentives of the buyer and seller, as both parties have a shared interest in ensuring that the business performs well after completion of the acquisition. This can be particularly useful if the seller is to remain involved in the business post-acquisition, as they are incentivised to ensure the business continues to perform well.

Preserving cash flow

An earn-out arrangement can allow the buyer to preserve cash flow in the short term, as they need not pay the full purchase price upfront. This can be particularly useful if the buyer needs to invest in the business post-acquisition to drive growth or if they are already carrying a significant amount of debt.

What are the drawbacks of earn-out arrangements?

While earn-out arrangements can be a useful tool for structuring M&A transactions, there are also drawbacks to consider:

Complexity

Earn-out arrangements can be complex and time-consuming to negotiate, as they require detailed financial projections and agreement on metrics that will be used to measure performance. Issues may arise around the calculation of earn-out amounts, the timing of payment, and the parties’ obligations during the earn-out period. Additionally, tracking and verifying performance over the earn-out period can be challenging, which can lead to disputes between buyer and seller.

Uncertainty

The future performance of a business is inherently uncertain, which can make it difficult to agree on the financial targets for an earn-out arrangement. Additionally, external factors such as changes in the economy, industry, or regulatory environment can impact business performance. This can make it challenging to accurately predict future earnings.

Integration challenges

Earn-outs have the potential to create integration challenges for the buyer, especially if the seller remains involved in the business. This can lead to conflicts over decision-making. They can also cause misaligned incentives between the buyer and the seller. For example, the seller may prioritise short-term financial results at the expense of long-term growth to maximize their earn-out payment.

Risk of non-payment

Even if the business performs well, there is always a risk that the buyer will not make the earn-out payment. To mitigate this risk, sellers commonly seek a form of security in respect of the buyer’s obligation to pay a deferred earn-out payment.

Top tips for negotiating and documenting earn-out arrangements

Negotiating and documenting earn-out arrangements can be complex, and it’s important to approach the process carefully to ensure that the arrangement is fair, clear and legally enforceable. Here are some of our top tips for negotiating successful earn-out arrangements that benefit both parties:

1. Clearly define the metrics that will be used to measure performance, the timeframe for achieving the performance targets, and any other details relevant to the calculation of the earn-out payment. Determine whether payments will be based on revenue, profit, or other performance measures, and how will the payments be structured (i.e. payable in cash or equity, by lump sum or installments). Clearly define the circumstances under which the earn-out payment will be made.
2. Understand the risks associated with earn-out arrangements including potential changes to the market, industry, and regulatory environment. It may be necessary to account for these risks by, for example, setting floors or caps on payments.
3. Address integration issues including whether the seller will be involved in the business post-acquisition, and if so, how their continued involvement will impact the earn-out arrangement. Both parties should have a common understanding of how decision-making will be handled and the extent of the seller’s involvement in the business during the earn-out period. Any restrictions on the seller’s role that could impact the earn-out payment should be outlined.
4. Consider each party’s motivations and incentives for entering into the earn-out arrangement. This can assist in structuring the arrangement in a way that aligns with the priorities of both the buyer and the seller.
5. Prepare for contingencies – determine how the earn-out will be handled if, for example, the business is sold, or the seller leaves the business before the earn-out period is complete.
6. Outline a process for resolving any disputes that arise over the earn-out payment. This may include expert valuation, mediation, arbitration, or other dispute resolution mechanisms.
7. Be prepared to walk away if a suitable arrangement cannot be agreed – it may be better to avoid a transaction if the terms are not in your interests.
8. Finally, it’s important to seek professional advice from lawyers, accountants and other experts when negotiating and documenting an earn-out arrangement.  This can help ensure that the agreement is legally enforceable and takes into account all relevant legal and tax considerations.

Negotiating and documenting earn-out arrangements requires careful attention to detail and a thorough understanding of the legal and financial implications. By following these tips, both buyers and sellers can ensure their earn-out arrangements are comprehensive, transparent, and designed to achieve their objectives.

As of 1 July 2023, the Australian Government will introduce a new Register of Foreign Ownership of Australian Assets (Register).  

The Register will be administered by the Australian Tax Office (ATO) and will record foreign interests in a broad range of Australian land, entities, businesses, and assets. The primary purpose of the Register is to consolidate the existing reporting framework for foreign ownership of Australian assets into a single, comprehensive database. It will replace existing registers covering residential land, agricultural land, and water rights, and incorporate reporting obligations covering a wider range of transactions. Importantly, reporting requirements in relation to the Register may apply irrespective of whether Foreign Investment Review Board (FIRB) approval is required for a transaction.

Significant penalties may be imposed for failure to comply with reporting requirements.

When will notification be required?

From 1 July 2023, “foreign persons” (as defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)) must make a notification via the ATO’s online portal within 30 days of a trigger for notification occurring.

What constitutes a trigger for notification differs depending on the type of asset(s) involved.

Businesses

Numerous notification triggers apply to the acquisition of interests in Australian businesses or entities by foreign persons, including where a foreign person takes an action that is:

1. a ‘significant action’ under section 40 or 41 of the FATA;
2. a ‘notifiable action’ under section 47 of the FATA involving the acquisition of a direct interest in an agribusiness or substantial interest in an Australian entity;
3. a ‘notifiable national security action’ under section 55B of the FATA; and
4. a ‘reviewable national security action’ under section 55D or 55E of the FATA.

If a foreign person acquires an interest in an Australian entity or business which was previously notified to the Register, it must also report any subsequent increase in its interest of 5% or more.

The notification requirements also apply to an Australian entity that becomes a foreign person, for example via acquisition. If this occurs, the Australian entity will need to report interests that would have required approval under the FATA if they had been acquired immediately after the Australian entity became a foreign person.

Land

Where Australian land is concerned, a foreign person must generally notify the ATO where they acquire (for example):

1. a freehold interest in any Australian land;
2. an interest as lessee in a lease giving rights to occupy Australian land if the term of the lease (including any extension or renewal) likely to exceed five years; or
3. an interest in a mining or production tenement, such as a mining lease.

The ATO must also be notified if:

1. a person holding any of the above interests in land becomes a foreign person; or  
2. the nature of the land changes, for example, from commercial to residential, and the foreign person ought reasonably to have been aware of the change.

Other

Reporting requirements also apply in respect of interests in exploration tenements and registrable water interests.

Key changes

The introduction of the Register will increase compliance obligations for foreign persons as it captures a broader set of transactions than those currently required to be reported. For instance, the Register will cover not only acquisitions and disposals, but changes occurring while an interest in the asset is held, such as changes in the nature of Australia land and changes to the quantum of the foreign person’s interest in a business or entity.

Currently, the acquisition of freehold or leasehold interests exceeding five years in commercial land does not require reporting unless FIRB approval is required and the relevant approval contains a reporting condition. Going forward, all acquisitions of interests of this type will need to be notified to the ATO for inclusion in the Register.

Australian entities will be required to report ownership of certain assets if they become foreign persons. An Australian entity can become a foreign person for the purposes of the FATA due to changes in its direct or indirect ownership. Tracing rules apply which mean companies incorporated in Australia can be classified as foreign persons under the FATA due to upstream interests.

More detail on reporting requirements is provided in amendments to the Foreign Acquisitions and Takeovers Regulation 2015 (Cth).

Conclusion

The introduction of the Register marks a significant change in the reporting and compliance landscape for foreign investors in Australia. With increased obligations and potential penalties for non-compliance, foreign persons should familiarise themselves with the new requirements and seek appropriate advice to ensure they remain compliant in an evolving regulatory environment.

The law regulating foreign investment in Australia is complex, and the information provided here is intended for general informational purposes only. This article should not be relied upon as a substitute for obtaining specific advice tailored to your circumstances. If you are considering foreign investment in Australia, we recommend you seek professional advice that takes account of your specific situation.

Two years ago, Clark Rubber started harnessing the power of Arreis, our document automation software, to help them streamline and automate the preparation of their legal franchise documentation for new and renewing franchisees.

Today, their staff (even without legal training) can complete an online survey to generate an entire suite of franchise contracts in less than 15 minutes.  

Read CEO Anthony Grice’s article in the FCA Franchise Review about how automating the process has helped the Clark Rubber team reduce errors, ensure up-to-date documents, and save valuable time and resources (READ HERE).

The ability to do all this without the need for full time lawyers has been a real game-changer for Clark Rubber.

The risk to your business

There are multiple risks to your business, should a BEC attack occur, including:

• Financial loss – often BEC attacks trick people into making unauthorised financial transfers which can result in significant financial losses for the business.
• Reputational damage – a BEC attack can damage your business reputation, as customers and other stakeholders may question your information security.
• Legal liability – heavy penalties now apply for data breaches under the Privacy Act 1988 (Cth).
• Disruption to operations – personnel are forced to devote time and resources to resolving the issue and recovering from an attack.
• Loss of sensitive information – BEC attacks often involve the theft of sensitive information, such as confidential business data or personal information of employees and customers. The theft can severely affect the privacy and security of individuals and businesses.

Reducing the risk of a BEC attack

It is important that every business understands cyber risk and takes steps to mitigate it. This means being prepared, knowing how to respond, and understanding both your regulatory requirements (ie. notification requirements under privacy legislation) and your contractual requirements (ie. a notification requirement of a breach under your contracts with third parties).

Preventing BEC attacks requires a multi-layered approach that includes a combination of technical and non-technical measures.  Some key steps that organisations can take to reduce the risk of BEC include:

• Take a top-down approach – your company directors need to be aware of the risks of BEC and actively guide the business’ strategy around privacy and data security.
• Raise employee awareness – educate your employees on how to recognise, report and respond to, a BEC attack. Employees are the first line of defence against BEC scams so providing regular training on cybersecurity and phishing awareness, including how to spot phishing links, how to avoid clicking on unknown links or attachments and how to check for a domain and email mismatch and other red flags through ‘phish’ simulations is critical.
• Create a culture of compliance – ensure that privacy and data protection policies are in place (and updated regularly) and that employees are aware of and trained in such policies.  Make it easy for employees to report suspicious emails.
• Vendor management – verify the authenticity of all vendors and suppliers before making payments or providing sensitive information. It is important to establish alternative channels of communication to confirm requests (ie. phone call or in-person conversation), especially for large or unusual transactions.
• Payment verification - companies should establish clear policies and procedures for financial transactions, such as requiring multiple levels of approval and verification for EFTs or other financial transaction.
• Improve your email security – there are many options available such as multi-factor authentication, email filtering, email encryption and anti-phishing software.  Work with your IT team or engage a cyber security consultant to conduct a security audit to identify potential vulnerabilities and ensure that security measures work as intended. Ensure all software is kept up to date, including anti-virus software.
• Back up data regularly – ensure regular backups of critical data and store it in a secure location, such as an off-site server to minimise the impact of a BEC attack.
• Prepare an incident report plan - this assists security teams to quickly detect and analyse the breach, assess the impact and effectively remediate the threat.

By taking these steps, you can reduce the risk of falling victim to a BEC attack and minimise the impact of an attack once it occurs. It is important to remain vigilant and stay informed about the latest threats and trends in cybersecurity. Being proactive about information security is essential.  

If you would like to discuss BECs in greater detail, how to respond to an attack, compliance requirements or have your privacy and data protection policies reviewed or updated, get in touch with a member of our Sierra Legal team today.

Business email compromise (BEC) is a type of cybercrime that involves targeting companies and organisations of all sizes, from small startups to large corporations, through their email systems. BEC scams are increasingly common and can result in significant financial losses for businesses, as well as damage to their reputations.

In the most recent report published in November 2022 by the Australian Cyber Security Centre (ACSC), in the 2021-2022 financial year, the ACSC received over 76,000 cybercrime reports. This equates to one cyber incident report every seven minutes (or over 200 reports a day).  Given that reporting a cyber incident to the ACSC is voluntary, it is likely that the true number of cyber incidents in Australia is significantly higher than those reported.  In monetary terms, the ACCC’s Targeting Scams Report 2022, states that Australian businesses were scammed out of $277 million in “payment redirection” cons through BECs over the course of 2021.

Email remains the number one way to attack businesses, particularly with the increased demand for hybrid and remote working, making employees vulnerable.  It is therefore crucial to position yourself with the knowledge and skills that can help to prevent a BEC event from happening to your business.

What is BEC?

BEC is a type of cybercrime where the scammer gains access to an employee’s email account through a phishing attack or other means of hacking.  Once they have access, they can monitor the employee's email traffic and use this information to send fraudulent emails that appear to come from the company's executives or other high-level employees or from a law firm, bank, internet provider or other supplier used by the business.  These emails often request the recipient to transfer funds, change account details, or share sensitive information. They may also contain malware or other malicious code that can infect the recipient's computer or network.

How does a BEC attack work?

Scammers either gain unauthorised access to a legitimate email account from which they send an email, or they send it from an email address which looks like a legitimate email account, known to you or your employees, but which contains a small change (i.e. the email address is off by a letter or two or it might be the correct email address but via a different domain).  This is done in the hope that the email address mismatch is not noticed by the recipient.  

The email usually contains a request for urgent payment or sensitive information.  The attacker may also use social engineering techniques, such as pretexting, to convince the victim to comply with their request.

Once the victim has been duped into making a payment or providing sensitive information, the attacker may use this information to perpetrate further fraud or sell the data on the dark web. In some cases, the attacker may use the compromised email account to send additional fraudulent emails to other employees, spreading the attack throughout the organisation.

Types of BEC attacks

There are several types of BEC attacks, each with its own modus operandi. Some common types of BEC attacks include:

CEO Fraud: In this type of attack, the attacker impersonates the CEO or other high-ranking executive and sends an email requesting an urgent payment or transfer of funds.

Invoice Fraud: The attacker sends a fraudulent invoice, posing as a supplier or vendor, requesting payment for goods or services.

Lawyer Impersonation: The attacker poses as a lawyer or legal representative and requests confidential information or payment for legal fees.

Account Compromise: The attacker gains access to an employee's email account and uses it to send fraudulent emails to other employees or to request sensitive information.

Next Week

In next week’s blog post we will continue the discussion on BECs, including the potential risks that a BEC attack poses to your business and how to lower the risk of a BEC attack occurring.

As the world emerges from the pandemic, many businesses are pushing their staff to return to the office and resume pre-pandemic work routines.  Some businesses are taking a hard-line approach, mandating that employees return to the office full-time, while others are offering a more flexible approach with a mix of in-office and remote work options.

Return to office policies can vary depending on the organisation and the industry, but in our view, there are some common drivers:

• Some employers have concerns about productivity and collaboration when employees work remotely, and may feel that they can only ensure high performance by having their staff physically present in the office.
• Others are hesitant to fully embrace new remote work technologies and tools, either because of perceived cost or cultural barriers to change.  
• Some businesses might be motivated to have employees return to the office in order to justify the high cost of office space and ensure they are “getting their money’s worth”.
• For some employers, the office is seen as a critical part of their culture and way of doing business, and so returning to the office is seen as a necessary step to maintain that culture.

At Sierra Legal, we believe that people often do not fully appreciate the benefits of remote work, with many viewing it as a temporary solution that was only necessary during the pandemic.

Remote work can be a more superior working model for certain employees and roles, offering many benefits:

• One of the obvious benefits is increased flexibility, with employees able to work from home, a coffee shop or any other location that suits their needs, as long as they have access to the necessary resources and tools.  This allows them to balance work with other aspects of their lives, such as family responsibilities or personal interests, which in turn can lead to increased job satisfaction and better mental health.  
• Remote workers often report higher productivity due to reduced distractions and the ability to work in a comfortable environment.  
• Remote working allows both employers and employees to save money on expenses such as commuting, office space and meals.  
• By recruiting remote workers, employers are often able to tap into a wider pool of talent since location is no longer a barrier to employment.  
• Remote working can have important environmental benefits, as it reduces the need for commuting and decreases the carbon footprint associated with transportation to and from the workplace.  

Whether remote work is a superior working model will depend on the needs and preferences of both employers and employees, but it is clear that remote work can be a win-win situation for all parties -  not just the employer and employee, but also the employer’s clients, the employee’s family and friends, and the wider community.

At Sierra Legal, we have physical offices in Brisbane and Melbourne that we can access and use as required.  However, we are predominantly a remote working model, with our team of lawyers having worked remotely for over 13 years (way before remote work became a “thing”).  We have lawyers in Brisbane, Newcastle, Melbourne and even Cape Town, South Africa!  

Working remotely has its challenges, but we’ve learnt the following over the years in building a highly productive and supportive remote work environment:

1. Communication:  Effective communication is essential for any team, but it's even more important for remote teams.  They need to be able to communicate clearly and frequently, using a range of tools such as video conferencing, messaging apps, and project management software.  Regular online check-ins are critical to remote working success.  We conduct a daily online team meeting to discuss client work, provide feedback, discuss progress and address any concerns.  Regular check-ins build trust, maintain team cohesion, and foster a sense of community.
2. Trust:  Remote teams need to trust each other to get the work done.  This means setting clear expectations and deadlines, being reliable and accountable, and being transparent about progress and challenges.  We've come together as a team to define our goals and how we'll achieve them as a remote team.  We've set clear roles and expectations and identified individual needs and goals.  Clear expectations help your team to stay focused, motivated, and working towards the same goals.  In our view, if an employer does not trust some or all of its employees, remote working simply won’t work.
3. Collaboration:  Working remotely doesn't mean working in isolation.  Remote teams need to collaborate on projects, share ideas, and support each other.  This can be done through regular calls and online team meetings, mixed with the occasional catch up in person.  It’s essential to create a positive work environment that fosters collaboration and creativity, and as part of this, taking time to catch up and connect as colleagues and friends, rather than always talking about work matters.
4. Technology:  Having the right technology tools is critical for remote teams.  This includes things like project management software for managing tasks and client deadlines, document automation, video conferencing tools, instant messaging, voice recognition software, simultaneous online document editing, online research tools, and cloud-based storage for sharing files.  Having the latest technology enables our team to work together seamlessly.
5. Flexibility:  Remote teams often work across different time zones and have different schedules.  Being flexible and accommodating to individual needs can help ensure everyone stays productive and engaged.  Because working from home can blur the lines between work and personal life, we encourage our team to take breaks and time off to recharge and avoid burnout.  One of the main reasons we set up the remote working model was to ensure that, as busy lawyers, we could also be present parents, partners, and family members.  While unsociable hours are sometimes part of our job, having flexibility to pick up kids from school, work out at the gym, train for a marathon, or take time to clear our heads, helps to promote the team’s overall well-being.
6. Culture:  A strong team culture is important for any team, but it can be harder to build in a remote environment.  Creating opportunities for team members to socialize and get to know each other (even if this is done mostly online), can help build trust and foster a sense of community.  At Sierra Legal, our strong team culture is evidenced by the fact that in over 13 years since starting the business, only 5 of our lawyers have left us (all taking up in-house roles) and they all remain good friends of the firm.  
7. Infrastructure and support:  It is important to provide the right support and infrastructure for your team to succeed.  This includes providing the necessary equipment, training, resources and tools to enable your team to do their job effectively, as well as just giving regular and friendly support, guidance and encouragement to the team.
8. One in, all in:  In our view, the remote working model is unlikely to work well in an environment where some people in the team are working remotely, and others are insistent on the traditional “full-time in the office” arrangement.  One of Australia’s major banks recently mandated that its senior leaders were required to work at the office 5 days a week, but that its broader workforce could work flexibly with a minimum of 2 or 3 days a week in the office.  This type of arrangement could put additional pressure on those employees working from home, the clear message being that if they want to progress in the organisation, they need to work more in the office.
9. Having the right people:  Without stating the obvious, it’s important to have the right people in your team.  It’s essential to have employees who are self-motivated, disciplined and have good communication skills.  Remote workers need to be able to work independently without constant supervision and be able to manage their time effectively.

At Sierra Legal, we have successfully used a remote working model for over 13 years, making us experts in the field of remote work.  We understand the nuances and challenges of working remotely and have developed strategies and best practices to ensure that we are able to maintain the highest standards of productivity and quality.  With our extensive legal expertise and proven remote work experience, we are well-equipped to provide top-notch legal services to our clients, no matter where we are located.

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Case study – Sierra Legal advises the shareholders of Clemenger International Freight

Sierra Legal recently advised the shareholders of Clemenger International Freight on a merger transaction, in which Clemenger's long-term partner, SJ Group, became a major shareholder of Clemenger International Freight, and with the enlarged Clemenger/SJ Group business having approximately 350 staff spanning across 14 cities in Australia, China, Hong Kong and New Zealand.

How it began

When the Managing Director and major shareholder of Clemenger International Freight, Michael Clemenger, first contacted Sierra Legal a few years ago, he had never been through a merger or other form of M&A transaction in the past.  

Michael wanted to understand at an early stage what was involved and whether his business was ready for such a transaction.  He needed an experienced legal team that could help him understand and prepare for the process.

How we helped

After spending some time with Michael explaining the process involved in a merger transaction, we initiated a comprehensive “legal audit” of the Clemenger International Freight business.

This involved the following work on our part:

• providing Michael and his senior management team with a detailed legal audit questionnaire;
• collating and reviewing the responses and documents received in response to the questionnaire;
• asking a series of further questions based on those responses and documents; and
• preparing a detailed legal audit report – this report identified “gaps” in the business from a legal perspective and recommended an appropriate way forward to deal with each of those gaps and ensure that the business was otherwise ready for any merger or other transaction.

Following completion of the legal audit, Michael and his team spent some time working through and implementing the recommendations in the legal audit report.

A decision was then made in 2022 to proceed with the merger transaction with SJ Group, and the transaction successfully completed in late 2022.

Was it a success?

Clemenger’s merger with SJ Group was a great success, for both Michael and his fellow shareholder in the company.

The legal audit helped the business get its “backyard in order” before entering into the merger, as well as enabling the due diligence process as a prelude to the merger to be conducted smoothly and without any “surprises”.

Once the recommendations in our audit report were implemented and a decision was made to proceed with the merger, we worked closely with Clemenger’s appointed corporate adviser to ensure that the merger was documented in a way that protected the shareholders to the maximum extent reasonably possible.

What did the client think?

It was fantastic having Sierra Legal’s support throughout the whole journey that began with a comprehensive legal audit of our business a couple of years ago, and then finished with our recent successful merger with SJ Group.  I was always impressed with the high level of legal expertise and experience offered by the team at Sierra Legal, but with the important overlay of always taking a commercial and practical approach.  I also appreciated Sierra Legal’s reasonable and transparent pricing arrangements, and their willingness to work around the clock to meet deadlines and get the transaction completed.  

Michael Clemenger

Managing Director, Clemenger International Freight ¶

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What is greenwashing?

Greenwashing is a tactic used by companies to make their products or services appear more environmentally friendly than they actually are.  It involves making false or exaggerated claims about the environmental benefits of a product or service to appeal to environmentally conscious consumers.  The term "greenwashing" is derived from the word "whitewashing", which means to cover up or conceal something negative.

Greenwashing can take many forms, such as using vague or meaningless environmental buzzwords, including "green", "eco-friendly", or "sustainable", without providing any specific information on how the product or service is environmentally friendly.  It can also involve exaggerating the environmental benefits of a product or service or making claims that are difficult to verify.

Why is greenwashing a problem?

Greenwashing can mislead consumers into thinking that a product or service is better for the environment than it actually is, which can result in them making purchasing decisions based on false information and inadvertently supporting companies that engage in environmentally harmful practices.

Greenwashing can damage consumer trust in environmental claims and labels, making it more difficult for consumers to make informed decisions about the environmental impact of the products they buy.  This can ultimately harm the environment by reducing the effectiveness of sustainability initiatives and slowing progress towards a more sustainable future.

Greenwashing can also undermine the efforts of companies that are genuinely committed to sustainability and environmental protection.  By making false or exaggerated claims, companies that engage in greenwashing can make it more difficult for consumers to differentiate between genuine environmental leaders and those that are improperly trying to capitalize on the growing demand for environmentally friendly products and services.

How does the law deal with greenwashing?

Under the Australian Consumer Law (ACL), it is illegal for businesses to make false or misleading claims about the environmental benefits of their products or services.  This includes claims that a product is environmentally friendly, sustainable, or has a reduced impact on the environment, if these claims cannot be substantiated.  Greenwashing could be a breach of section 18 of the ACL (which prohibits engaging in misleading or deceptive conduct in trade or commerce) and section 29 (which prohibits a person from making false or misleading representations about goods or services).

The Australian Competition and Consumer Commission (ACCC) monitors compliance with the ACL and is looking to step up enforcement efforts, encouraging consumers and businesses to contact the ACCC to report any potentially misleading environmental or sustainability claims.

In late 2022, the ACCC undertook an internet "sweep" of a sample of businesses to assess their environmental claims.  Releasing its findings earlier this month, the ACCC found 57% of businesses surveyed made sustainability claims that raised greenwashing concerns.  The ACCC plans to undertake a more targeted analysis of the businesses involved, in addition to a number of active investigations already underway.

Increased penalties for breaches of the ACL came into effect late last year, with the new maximum financial penalties for businesses now being the greater of:

• $50,000,000;
• 3 times the value of the "reasonably attributable" benefit obtained from the conduct, if the court can determine this; or
• if a court cannot determine the benefit, 30 per cent of adjusted turnover during the breach period.

It’s not just the ACCC monitoring compliance and taking action.  The Australian Securities and Investments Commission (ASIC) can also take enforcement action against greenwashing activities and has made it one of its priorities for 2023.  Late last year, ASIC issued its first penalty for greenwashing, fining Australian company Tlou Energy Limited $53,000 for making false or misleading sustainability related statements on the ASX.

In February this year, ASIC launched its first court action against alleged greenwashing conduct, commencing civil penalty proceedings in the Federal Court against Mercer Superannuation (Australia) Limited (Mercer) for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

ASIC is seeking declarations and pecuniary penalties from the Court, together with injunctions preventing Mercer from continuing to make any of the alleged misleading statements on its website. It is also seeking orders from the Court, requiring Mercer to publicise any contraventions found by the Court.

What should businesses do?

Businesses should review any environmental or sustainability claims they have made in relation to their business to ensure:

• environmental and sustainability claims take account of the entire lifecycle of their product or service, or where claims relate to only part, specify this;
• claims are clear and specific, and vague language is avoided; and
• claims are accurate and can be substantiated.

The ACCC has a published guidelines for businesses on how to make accurate and substantiated environmental claims, which are available here. These guidelines provide information on how to avoid greenwashing and ensure that environmental claims are truthful, accurate and verifiable.

Now, more than ever, businesses need to tread carefully when making ESG claims.

Please contact the Sierra Legal Team if you require further information about this topic or assistance with your ESG obligations.

At Sierra Legal, we are experts in mergers and acquisitions and our team has extensive experience and knowledge in M&A transactions.

2022 was another busy year for us on M&A transactions.

A selection of the key M&A deals we worked on in 2022 are set out below:

We advised the shareholders of Clemenger International Freight on a merger transaction, as a result of which Clemenger's long-term partner, SJ Group, became a major shareholder of Clemenger International Freight, and with the enlarged Clemenger/SJ Group business having approximately 350 staff spanning across 14 cities in Australia, China, Hong Kong and New Zealand.

We advised the shareholders of Cosmos 21 (a leading systems integrator and software development house, focusing on mobile technology platforms) on the sale to Zenput, a US-based technology company which has subsequently been acquired by CrunchTiime.

We advised on the sale of Nimbus Technology (the operator of the Nimbus Portal Solutions online document management system) to MYOB.

We advised on the sale of Maple Plan (the operator of an NDIS plan management business) to NIB.

For more information on our M&A expertise, please contact any member of the Sierra Legal team, whose contact details can be found here (LINK).

Significant reforms to Australia’s privacy laws took effect in late 2022, fast-tracked in response to a number of high-profile data breaches. The reforms substantially increase penalties for serious or repeated interferences with privacy and expand the enforcement powers of the Office of the Australian Information Commissioner (OAIC). The 2022 reforms are intended to ensure businesses take privacy obligations seriously, with more extensive reforms expected within the next 12 to 18 months.

Key reforms that took effect in late 2022 include:

1. Increased civil penalties for serious or repeated interferences with privacy

Penalties have been increased significantly for serious or repeated interferences with privacy. Penalties for individuals have been increased from $444,000 to $2.5 million. For bodies corporate, the previous penalty of $2.22 million has been increased to am amount not exceeding the greater of:

• $50 million;
• three times the value of the benefit obtained from the conduct constituting the serious or repeated interference with privacy, if the court can determine this value; or
• if the court cannot determine the value of the benefit, 30% of the body corporate's ‘adjusted turnover’ in the relevant period.

The definition of 'adjusted turnover' is similar to that introduced into the Australian Consumer Law and takes into account the sum of the values of all the supplies that the body corporate and any related body corporate have made or are likely to make during the period, with specified exceptions.

2. Improved enforcement and information sharing powers

The reforms provide the OAIC with enhanced enforcement and information sharing powers. The OAIC can now issue infringement notices for failures to provide information when required, with associated penalties and a criminal offence for systemic failures to provide information.

The OAIC can also:

• require information in relation to an actual or suspected eligible data breach;
• share information with other authorities to enable the OAIC or another authority to exercise its powers; and
• publicly disclose information if it is in the public interest to do so.

3. Expanded extraterritorial application

Overseas businesses are now bound to comply with the Privacy Act 1988 (Cth) if they “carry on business” in Australia. Previously such businesses were also required to collect or hold personal information in Australia before the Act would apply.  This second limb has now been removed.

Outlook for 2023

The 2022 legislative changes were just the start of the Australian’s Government’s planned reform of  privacy laws. The Attorney-General's Department released its Privacy Act Review Report (Report) in February 2023, which proposes expansive reforms to the Privacy Act. Containing 116 recommendations, proposed reforms are aimed at strengthening the protection of personal information and the control individuals have over their information.

Over time reforms are expected to shift the burden from individuals, who are currently required to safeguard their privacy, and place more responsibility on organisations who collect and use personal information to ensure that their practices are fair and reasonable.

Feedback is now being sought to inform the Government’s response to the Report. Submissions are due by 31 March.

Steps to take now

The regulatory and political focus on privacy means 2023 is an ideal time for businesses to review and reset privacy practices. Businesses should review their controls and policies relating to the collection, use, storage and de-identification of personal information in preparation for significant changes in Australia’s privacy regime.  

Businesses should take the time to:

• understand what data they hold;
• understand where their data is stored;  
• de-identify or destroy personal information that is no longer required;
• review privacy policies and procedures, together with retention policies; and
• ensure they are adequately prepared to respond to a cyber-attack or data breach, which includes having a well thought out incident response plan.

It is important to note that increased maximum penalties for serious or repeated privacy breaches and strengthened OAIC enforcement powers have already commenced.

Please contact the Sierra Legal Team if you require further information about the privacy changes or assistance with your privacy obligations.

Why I chose a career in the law?

I chose a career in law because I wanted to understand the documentation that facilitates economic activity in our society. Understanding this means I can contribute to economic growth by documenting the contractual relationships that allow economic activity to occur.

What unique perspectives do women bring to the law?

Women often bring a different approach to contractual negotiation, focusing more on relationship building and collaboration. This can be helpful in developing long term and profitable commercial relationships, especially in industries where negotiations can become confrontational.

Any female role models and why?

Elle Woods. Sure, she’s fictional, but she demonstrated that strength can be derived from traditionally feminine character traits and pursuits, not despite them.

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Why I chose a career in the law?  

I chose to study law because I thought it would be a good skill set to have, for whatever I career I chose in the future.  Becoming a practising lawyer was not something I had planned on, but after discovering that the law was able to combine problem solving, logic and writing I found I really enjoyed it.   I was also raised in a feminist household and attended an all-girls high school, growing up to believe I had every right to have a ‘seat at the table’ in whatever arena I was able to demonstrate the necessary skill.  I didn’t even imagine that my gender would be an issue in the workplace.  As a young lawyer, it came as quite a shock when I realised just how much of an issue it was!

What unique perspectives do women bring to the law?  

The law applies to all genders so it only makes sense that all genders should have a role in all aspect of the law.  Generally speaking of course, women have a different approach to problem solving and communication, and I’ve found that that approach can be invaluable around a negotiating table.  There’s more than one way to get a deal done, and often what is needed is a different perspective or a different method of delivering the information.

Any female role models and why?  

So many!  As the saying goes,  we stand on the shoulders of those that have come before us.  Millions of women from all walks of life have fought big and small battles that have ultimately allowed me to have this career. I thank them all.  And I recognise my obligation to those that come after me to do the same – to demand equality in all places it does not yet exist for women.

Why I chose a career in the law?

Becoming a lawyer was not my first choice as a career. I was a police officer in South Australia but when I moved to Victoria to live, due to my life partner getting a transfer with the Air Force, I had to give up my policing career.  In the mid-90s transferring as a police officer to another State was not allowed. I was required to start as a cadet again at the Police Academy in Victoria, which was crazy given that I was a senior member of the police force in South Australia.  My partner then decided that he wanted to study law whilst remaining in the Air Force, and he asked me if I was interested in sitting the university entrance exam for law with him.  I had nothing better to do at the time, so I decided to sit the exam and was successful. The rest is history!

What unique perspectives do women bring to the law?

I think women bring a unique perspective and value to the law because of their diverse experiences and backgrounds.  Historically, women have been underrepresented in the legal profession, which has resulted in a lack of female perspectives in the development and application of the law. However, as more women have entered the field of law, their voices and experiences have begun to shape legal policies and practices in meaningful ways.

I believe that women bring a unique style of leadership to the legal profession that emphasises collaboration, relationship-building, and consensus-building.  This can lead to more effective and sustainable legal policies and practices. Women also bring empathy and compassion to the law.  By this I mean that women are often socialised to be caregivers and nurturers, which can translate to a greater sense of empathy and compassion for others.  This can be especially valuable in legal contexts where clients may be facing difficult and emotionally charged situations.  

Finally, while resilience is an important attribute for all lawyers, women in the law often face unique challenges that require a particular kind of resilience. Studies show that women lawyers are more likely to experience gender bias, discrimination, and harassment in the workplace.  However, despite these challenges, many women in the law have demonstrated remarkable resilience. They have persevered in the face of adversity, overcome obstacles, and achieved great success in their careers.  It is important that as women in the law, we support and advocate for each other.

Any female role models and why?

I have a few but in relation to law, the late Ruth Bader Ginsburg tops my list.  She advocated for gender equality, broke barriers by becoming the second woman appointed to the US Supreme Court, paving the way for other women to follow in her footsteps and she was a strong leader, both on and off the bench.  Despite facing many obstacles throughout her career, Ginsburg persevered and continued to fight for what she believed in. She inspired women and girls to pursue their dreams through courage, hard work, humility, determination, and perseverance.

Undertaking due diligence is a crucial step in the process of acquiring a business. The due diligence process generally involves a detailed investigation to thoroughly assess the target business’ assets, capabilities, and financial performance, and identify potential problems or unexpected liabilities. It is a valuable risk management tool that allows the buyer to make informed decisions and avoid unpleasant surprises.

Due diligence allows the buyer to identify and mitigate potential risks and liabilities that could impact on the target business’s value or return on investment. It helps the buyer and seller establish a realistic valuation of the business, and assists the buyer to gain a comprehensive understanding of it. The results of due diligence inform the terms of the transaction, including price, warranties, and payment terms.

For a buyer undertaking due diligence, it is essential that the process be conducted thoroughly yet efficiently. Here are our top tips for conducting effective due diligence:

Tip 1: Negotiate an exclusivity period with the seller - an exclusivity period will ensure that the buyer can devote time and resources to undertaking due diligence without being concerned that the seller is, at the same time, trying to solicit other offers for the target business.

The majority of M&A deals have a buyer exclusivity period during which the seller agrees to discontinue marketing and stop actively looking for buyers. Also known as a “no shop” period, the seller agrees to deal exclusively with the buyer during this period, preventing the seller from soliciting, negotiating or entering into agreements with other buyers.

The due diligence process takes time. It is important the buyer allows sufficient time for thorough due diligence to be undertaken as part of the transaction timetable and that this is reflected in the exclusivity period.

Tip 2: Engage experienced advisers – a buyer should engage advisers (including lawyers, accountants and tax advisers) experienced in advising on M&A transactions to assist in conducting (and reporting on) due diligence on a target business.

Experienced advisors will know what issues to focus on (or look out for) during the due diligence process. They will assist the buyer in developing a comprehensive due diligence plan, conducting research required to uncover potential risks, and providing recommendations for dealing with due diligence findings.

Tip 3: Tailor the scope of due diligence - before obtaining detailed information from the seller, the buyer and its advisers (legal and financial) should tailor the scope of due diligence to fit the target business. The scope of the due diligence review will depend on factors such as the nature of the business, its size and value, the industry it operates in, and the risk appetite of the buyer. Materiality thresholds are often adopted to enable the buyer’s due diligence team to focus (and report) only on matters of sufficient materiality. This can improve the efficiency of the due diligence process and ensure relevant issues are not overlooked.

Tip 4: Obtain relevant and detailed information about the target company – it is standard practice to issue the seller with a due diligence questionnaire that has been customised for the specific nature of the transaction and target company’s business. The purpose of the due diligence questionnaire is to gather relevant information about the target business to assess its value and potential risks.

The seller should also be collating due diligence materials in an online data room. Materials in the data room typically include:

• financial information including financial statements such as the income statement, balance sheet, and cash flow statement, as well as tax returns and any other documentation required to provide a comprehensive picture of the target company’s financial performance;
• corporate governance and ownership materials such as constitution, shareholders agreement, share certificates, and member registers;
• legal contracts that are important to the business such as sale, supply, service, and distribution agreements, and leases;
• intellectual property records including details of patents, trademarks, copyrights, and other intellectual property the target company owns or has licensed;  
• information technology materials including details about the target company's technology infrastructure, such as software, hardware, and data storage;
• human resources information such as organisational charts, policies, and employment contracts;
• litigation or regulatory filings including information regarding any current or pending cases or investigations; and
• environmental information including any environmental assessments, permits, regulatory approvals or other documentation related to the company's environmental impact.

Tip 5: Conduct a detailed and targeted review - Once the seller has completed the questionnaire and uploaded documents to the data room, the buyer and its advisers will review these materials. Typically, a due diligence review is divided into several separate components, each conducted by the relevant experts:

• Legal due diligence: this includes a review of the corporate structure and records of the target company, material contracts, results of searches of registered intellectual property, business names, registrations of personal property securities and other securities, current proceedings, and transfers of employees and their entitlements;
• Commercial due diligence: this includes a review of real property/premises, plant and equipment, stock and inventory, systems and processes, employees, customers, products and services, suppliers, assets, insurance, market trends and issues;
• Financial due diligence: this includes a review of financial performance, financial position, maintainable earnings, debtors, creditors, work in progress, salaries and wages, superannuation, finance facilities, guarantees and bonds, pre-payments, tax returns, liabilities, notices, disputes, penalties; and
• Tax due diligence: this includes a review of tax returns, liabilities, notices, disputes, penalties, etc and the tax impact of the transaction (as structured) on the buyer.

Tip 6: Review and act on due diligence findings - once the buyer’s advisers have completed their review of the due diligence materials, they will report their findings in writing to the buyer. Reporting is often done on an “exceptions basis” only (unless the buyer requires otherwise).  This means due diligence reports will only mention issues with a value or impact over a certain materiality threshold. The reports will contain recommendations for managing the issues uncovered during the due diligence process that will inform the buyer’s actions.

Provided the buyer wishes to proceed with the transaction, the next step is to negotiate definitive transaction documents. Issues identified in due diligence and the corresponding recommendations of the buyer’s advisers will frequently translate into protections sought by the buyer in the transaction documents. These could include the completion of certain actions as conditions precedent to completion, pre or post-completion undertakings, warranties addressing specific or general areas of concern for the buyer, or indemnities to protect the buyer from specific risks.  

If you have any questions on buying a business, undertaking legal due diligence or would like assistance with conducting legal due diligence on a target business, please do not hesitate to get in touch with one of the Sierra Legal team.

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Buying a business can be a complex and challenging process. It's important to be aware of the legal issues involved to ensure the transaction is successful and legally sound.

Tip 1: Know what you are buying  

Most businesses are operated through company structures.  This means that a buyer of the business can buy:

• the shares held by the shareholders of the company; or
• the assets used by the company to operate the business. 

There are crucial differences between share purchases and asset purchases that it is imperative for buyers and sellers to understand.  

• Share purchase transaction: this involves the buyer purchasing shares in the company that operates the business.  When a buyer purchases all of the shares, they become the sole shareholder or owner of the company. Through the company, they own everything the company owns (such as plant and equipment, land and buildings, goodwill, intellectual property, and rights and benefits under customer contracts).  Importantly, the buyer is also “buying” the liabilities of the company (which are factored into the purchase price).  
• Asset purchase transaction: this involves buying all or only some of the assets used to operate the business.  Assets may include contracts, plant and equipment, land and buildings, goodwill, and intellectual property.  In an asset purchase transaction, the buyer may prefer to purchase just the assets used in the relevant business, leaving behind extraneous assets as well as debts or liabilities.   

There are advantages and disadvantages of buying assets versus shares and vice versa. Buying just assets can provide flexibility, allowing the buyer to choose the assets they want and avoid liabilities of the target business. On the other hand, buying shares is often a simpler because the buyer takes ownership of the business in one transaction.

The decision on whether to buy shares or assets does not have to be made straight away. A preferable approach may become clearer after undertaking due diligence on the target. There may also be tax reasons to prefer to purchase shares over assets or vice versa, and professional advice should always be sought in this regard from the outset.

Tip 2:  Negotiate an exclusivity period with the seller

The buyer should negotiate an exclusivity period during which it has the sole right to conduct due diligence on the target business.  The purpose of the exclusivity period is to prevent the seller from trying to solicit other offers or negotiate with other prospective buyers.  Also known as the “no shop” period, the seller agrees to exclusively deal with the buyer during this period.  

It is natural for buyers to want to protect their interest and improve the chances of a successful completion. They do not want to have to deal with late counter offers. Most buyers aren’t willing to spend time and resources if there is little certainty of closing the deal. Your lawyer can assist you with the appropriate documentation to ensure exclusivity during the due diligence period.  

Tip 3:  Understand your funding options

Before starting the acquisition process, a buyer should understand how it will fund the proposed acquisition (cash, debt finance, vendor finance, equity). There are many ways to acquire financing, but it is vital to plan the acquisition financing structure to fit the circumstances. The cost of the acquisition financing structure must be grounded in the cash-flow generating capacity of the target and the strength of its asset base.

If a buyer needs a loan to fund the acquisition, the lender may wish to take security over the shares or assets of the target business and review the buyer’s due diligence on the target business. Large volumes of debt are more appropriate for mature companies with steady cash flows. Businesses that compete in unstable markets, that want to grow fast and need large amounts of capital to do so are more likely to seek equity financing.

Tip 4:  Undertake your due diligence

Due diligence is essentially an investigation into (and an appraisal of) the target business. It is an opportunity to assess the value of its assets and liabilities as well as the businesses’ commercial potential. 

From a legal perspective, due diligence on a business acquisition includes things like:

• reviewing and cross-checking ownership records and corporate governance documents;  
• analysing material contracts for provisions that may be triggered by an acquisition or which are onerous in nature;  
• evaluating funding and borrowing arrangements, as well as any security granted over the assets of the business;  
• considering compliance with regulatory requirements such as environmental, health and safety, or industry-specific regulations;  
• assessing any litigation the business is subject to;  
• examining records of employees, their entitlements, and their employment contracts; and  
• conducting searches on any land or premises owned or occupied by the target business.

Beyond legal due diligence, a buyer will usually also conduct financial, commercial and possibly tax due diligence on the target company or business in conjunction with their financial advisors.  

The importance of due diligence should not be underestimated. This is because:

• a buyer should ensure that it knows what it is buying so that it can better manage the risks associated with the purchase;  
• it will assist the buyer to negotiate the terms of the purchase, for example, it may reveal certain risks in the target business which the buyer may want to protect against;  
• issues arising in due diligence can usually be dealt with in the transaction documents either as condition precedents or completion deliverables, or via warranties and indemnities; but  
• only the known issues and risks of a transaction can be managed to ensure an optimum outcome.  

The level of due diligence on the target business will depend on a number of factors including the value of the acquisition and the buyer’s experience in the relevant industry.  Please see our recent article for top tips when conducting due diligence (LINK).

Tip 5:  Understand what protections you may need in transaction documents as a result of due diligence findings  

If the buyer still wants to proceed with the purchase after conducting due diligence, the next step is to prepare, negotiate and enter into definitive transaction documents.  Sometimes a term sheet or heads of agreement is entered into first.  

Material issues arising from due diligence should be translated into protections sought by the buyer in the sale and purchase agreement and/or as adjustments to the purchase price.  Examples of buyer protections that are often included in a sale and purchase agreements include:

• having conditions precedent that must be satisfied before settlement or completion of the transaction;
• representations or warranties from the seller regarding the quality, condition, and title of the assets being sold;
• indemnification provisions that require the seller to compensate the buyer for any damages or losses resulting from breaches of the sale agreement or other contractual obligations; and  
• provisions that require part of the purchase price to be held back or retained until a specified action or result is achieved this could take the form of an earn out or escrow arrangement.  

If you have any questions on buying a business, undertaking legal due diligence, or would like assistance with conducting legal due diligence on a target business, please do not hesitate to get in touch with one of the Sierra Legal team.

What were you doing before Sierra Legal?

Working in corporate law for a top-tier law firm. Before I entered the law, I worked in banking as a business analyst and product manager. 

What do you do with your time when you aren’t advising on M&A deals and reviewing contracts?

I love escaping to the ocean, especially to scuba dive. When I’m not dealing with a transaction, you might find me underwater exploring a shipwreck or photographing marine life. Above water, I enjoy pilates and yoga as well as creative writing. 

What was your first job?

My first job was at the local supermarket. I used to work the checkout and also behind the deli counter. When it was quiet we would “face up” the shelves (bring the stock to the front). I was really good at facing up the tins of tuna!

What was the first thing you bought with your own money?

A portable TV. It was sort of like a Gameboy, but it had a tiny TV screen and a big arial you had to pull out. Reception wasn’t always the greatest, and the resolution was not so good either, but I thought it was pretty special. I didn’t actually end up actually using it much though due to the aforementioned reception and resolution issues. 

What was the last book you read?

“The Happiest Man on Earth” by Eddie Jaku - an amazing story of survival which emphasises the importance of kindness. 

Favourite place? 

Either the Great Blue Hole in Belize or Fish Rock Cave off the coast of South West Rocks in New South Wales. Fish Rock Cave is an ocean cave which runs 125 metres underwater through a rock in the ocean. Its inhabitants include grey nurse sharks, turtles, crayfish, and bull rays. 

Favourite food?

I will eat most things but favourites include sashimi, shellfish, Mexican, and, of course,  chocolate. 

Least favourite food?

I’m not very fussy but liquorice gets a firm “no” from me. 

Best advice you have received?

I’m still deciding on that. I like the approach taken by the Minimalists, for example the following minimal maxims: 

• The most effective way to declutter is to leave the junk at the store
• Our memories are not in our things; our memories are inside us
• The right thing to do is rarely the easy thing to do