So, you’ve decided upon the deal structure, signed the contract and undertaken your due diligence; the transaction is progressing towards completion, and you are beginning to imagine yourself in charge of what you hope will be a successful and profitable business.

You then hit a snag – the transfer of the business, and many of its main income-generating assets, are subject to third-party approvals. If this is you, don’t panic, help is at hand.

In part 6 of our series on M+A transactions, we address the most common forms of third-party approvals required to seal the deal.

 

corporate approvals

The board of directors for each party [or a duly appointed committee of the board] will often need to evaluate and approve the following:

  • The deal, including that it is in the company’s and its shareholders’ best interests.
  • Execution of the key transaction documents, as well as any additional ancillary documents necessary for completion.

Typically, a buyer will require a copy of the board minutes, or the board resolution, to be signed by all directors of the target company as part of the documents delivered at completion.

 

shareholder approval

Shares in private companies are not subject to transfer restrictions under the Corporations Act 2001 (Cth), assuming that the company is not in administration or has not commenced winding up.

However, private companies typically have share transfer restrictions in their constitution and in shareholders’ agreements. These can include:

  • The board of directors having the discretion to refuse to register a transfer of shares.
  • Rights of first offer or first refusal for shareholders to acquire the shares being sold at an agreed price, and in proportion to their percentage holdings, before they can be transferred to a third-party [pre-emption rights].

If the share purchase transaction is particularly significant, a corporate seller, buyer’s constitution, or shareholders’ agreement may require shareholder approval. A share purchase transaction is considered particularly significant if it fundamentally alters the buyer’s or seller’s business, or if it results in a holding company effectively disposing of all or substantially all of, its assets and business.

To incorporate these shareholder approval requirements and relevant voting thresholds, and to schedule them appropriately, a thorough and comprehensive review of the following documents should be conducted:

  • The relevant entities’ constitutions and shareholders’ agreements.
  • The relevant provisions of the Corporations Act

 

change of control

A change of control is typically a transfer that moves more than 50% of voting rights in a company, but can sometimes include a change in practical influence that can be exerted on company issues.

A transfer that results in a change of control often undergoes additional scrutinisation and as a result, additional steps are required to complete the transaction process.

 

regulatory approval

Depending on the industry in which the target company operates, share transactions that result in a change of control may require:

  • Regulatory approval from the regulatory authorities in those industries prior to the change of control [such as for food safety, educational requirements, or environmental approvals].
  • Notification after the change of control [such as for Australian financial services licensees].

 

contractual consents

In a share sale, where a transfer results in a change of control, the target company’s material contracts may require the counterparty’s consent.

In an asset sale, creditors do not have to be notified or have their consent obtained for the asset sale if the seller is solvent. However, the seller may have a contractual obligation to notify a creditor of a transfer of an asset in which the creditor has an interest.

If a creditor has registered a mortgage, caveat, or security interest over an asset, it is common practice to require the creditor’s security to be released before the asset sale. A transfer of a liability by novation to the buyer also requires the creditor’s consent.

 

seeking consent

When proceeding with either an asset or share purchase, where the consent of third parties is required, the timing of obtaining such consents must be considered. The contracts themselves may dictate when consent must be obtained and may require all costs be covered with respect to such consent.

Obtaining the consent of third parties also raises issues with respect to the confidentiality of a transaction, where one or both parties wish to keep the proposed transaction confidential. The impact of not obtaining required consents should be considered, especially if such contracts are material to the business.

Due to these issues, it is important that early in the process, any contracts that will be transferred or will remain with the target company are carefully reviewed, and the matter of how any required consents are obtained is discussed.

 

assigning contracts

To affect an assignment in the context of an asset purchase, the parties should enter into an assignment agreement. This means the vendor assigns, and the purchaser assumes, the contract and all rights, obligations, and benefits thereunder.

Often a contract will specify that the vendor will not be released of its obligations on an assignment. In such instances, the vendor and purchaser should address each of their obligations going forward.

Typically, the purchaser will be solely responsible, and will indemnify the vendor for any non-performance or breach by the purchaser under the contract from, and after, the date of assignment.

If consent for the assignment is required from a third party, such party can either be made a party to the assignment agreement, or a separately written consent can be obtained. If consent is not required, notice should be given to the third party that the assignment has or will occur.

To affect an assignment in the context of a share purchase, only the documents affecting the sale and transfer of shares are needed, as between the vendor and purchaser. Notice to, or consent of the third party to each of the contracts may be necessary – depending on the presence and content of any change of control provisions in each contract that the target company is a party to.

 

Originally authored by Brendan McGrath.

 

we’re here to help!

If you are considering purchasing a business, business assets or shares in a company, give the team at businessDEPOT Legal a buzz on 1300BDEPOT or get in touch via legal@businessdepot.com.au to discuss how we can help you.

In Part 7 of our merger and acquisition series we cover dealing with securities + completion. You can check out our full merger and acquisition blog series here.

 

general advice disclaimer

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.