This document sets out the basic requirements of business sale agreement for an asset sale.
Business sale agreements are often complex and will need to be customised for each particular transaction.
Share or asset sale?
When parties enter into negotiations relating to the sale of a business (where that business has a company structure), the parties must decide whether the business will be sold by:
- selling the shares of the company; or
- selling the assets of the company.
This decision will dramatically affect the issues to be considered by the parties, the due diligence investigations to be undertaken and ultimately, the type of agreement to be reached.
Purchasers of businesses generally prefer to buy assets rather than the shares of a company. The risk is often higher in buying shares, as the purchaser will become responsible for the historical, actual and contingent liabilities of the business. However, there may be very good commercial reasons to prefer a share sale transaction when purchasing a business. Among other things, benefits include potential tax concessions.
When selling or purchasing a business by way of a sale of assets, there are numerous matters which must be considered.
Regulatory approvals may be needed. For example the Foreign Acquisitions and Takeovers Act 1975 (Cth) regulates foreign ownership of Australian Companies. The Competition and Consumer Act 2010 (Cth) provides the Australian Competition and Consumer Commission (ACCC) with the power to determine whether the acquisition of shares by a specific purchaser would have the effect, or be likely to have the effect, of substantially lessening competition in Australia as a whole or in a state or territory in Australia.
The managers and employees of the business should also be considered. For example, practitioners should consider whether any managers and employees are crucial to the operation of the business given their skills, knowledge and relationships with customers. If they are, the purchaser should consider how to ensure that these managers and employees transition from the seller company to the purchaser’s business, taking into account any regulatory and award requirements. Employment contracts cannot generally be transferred between companies. This means that the seller has to terminate the employment of the relevant employee and the purchaser must then enter into a new employment contract with that employee.
Other considerations include:
- whether the purchaser requires the business to continue to operate from the same premises and, if so, is there a lease, and if the lease can be assigned;
- what assets are to be included in the sale, and what level of working capital is to be included in the sale;
- the value of the business, including the value of the assets to be included, such as stock, debtors and fixed assets;
- tax implications, including stamp duty issues, relating to each asset;
- the warranties required from the seller of the shares (warranties would cover issues such as the conduct of the business, the ownership and completeness of assets, its financial and tax position, compliance with the law, potential litigation and environmental issues);
- indemnities required from the seller (including the seller indemnifying the buyer for any tax liability);
- the operational methods used to transfer each asset from seller to purchaser (eg, how the seller will transfer to the purchaser individual supply arrangements (including communication supply agreements such as telephone and email connections), customer contracts, real property, leasing arrangements and material contracts of the business);
- how goodwill will be transferred;
- conditions document required for the particular transaction;
- the type of due diligence process to be followed and what type of issues are to be canvassed in the due diligence process; and
whether there are any restraint of trade requirements.
This document has been authored for Lexis Nexis by Jeremy Kriewaldt, Partner, Atanaskovic Hartnell and Elise Margow, Principal, Legally Speaking.
This document is prepared with the assistance of Specialist Editor Murray Landis, Partner, K&L Gates.