Whether you are acquiring a company, purchasing selected business assets or preparing your business for sale, understanding the legal process early can help you identify risks and avoid unnecessary delays. The documents and approvals required will depend on the size, structure and circumstances of the deal. However, several documents and transaction steps commonly form part of a business acquisition.
CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENTS
Early in the process, a potential buyer will usually need access to sensitive information about the business, such as financial records, customer details, supplier arrangements, pricing, business plans and intellectual property. A Non-Disclosure Agreement (NDA) helps protect this information. It usually sets out what information is confidential, how it may be used and who it may be shared with.
This is important because the acquisition may not proceed. If a buyer receives customer lists, pricing information or other valuable commercial information and later walks away, the seller will usually want to prevent that information from being used for another purpose. An NDA allows the parties to have meaningful discussions while protecting the business.
PRELIMINARY DOCUMENTS: HEADS OF AGREEMENT, TERM SHEET, LETTER OF INTENT OR MOU
Once both parties are interested in moving forward, they may sign a preliminary document. Depending on the transaction, this may be called a Heads of Agreement, Term Sheet, Letter of Intent or Memorandum of Understanding (MOU). Although the names differ, these documents generally record the main commercial points before the detailed sale agreement is negotiated. They can be thought of as a roadmap for the deal.
A preliminary document may cover the proposed purchase price, what is being acquired, how payment will be made, the expected timetable, due diligence arrangements and any important conditions. It may also deal with exclusivity, confidentiality, costs and the process for negotiating the final agreement.
These documents are not always intended to be fully binding. In many transactions, they record the parties’ current intentions, while particular provisions, such as confidentiality, exclusivity or costs, may be legally binding. The legal effect will depend on the wording and circumstances, so the document should be reviewed carefully before it is signed.
DUE DILIGENCE
Due diligence is a stage of the transaction rather than a single legal document. It gives the buyer an opportunity to investigate the business, confirm key information and identify risks that may affect the price, structure or terms of the acquisition. Depending on the deal, due diligence may occur before or after a sale agreement is signed. A buyer may also already have binding obligations under a preliminary document or a conditional sale agreement while the investigation is being completed.
The process is usually supported by several documents, including a due-diligence request list, a secure online data-room index, written questions and answers, and sometimes a due-diligence report prepared by the buyer’s legal, financial or tax advisers. The seller may provide financial statements, tax records, customer and supplier contracts, employment agreements, leases, company records, licences and permits, intellectual property documents, financing arrangements and details of existing or threatened disputes.
If due diligence reveals an issue, the transaction does not necessarily have to end. For example, the buyer may discover that an important contract requires third-party consent before it can be transferred or before control of the company changes. The parties may agree to obtain the consent before completion, adjust the purchase price, require a specific indemnity or deal with the risk through another provision in the sale agreement. Due diligence therefore helps the buyer understand the business and negotiate how identified risks will be managed.
SHARE SALE OR BUSINESS AND ASSET SALE AGREEMENT
The Sale Agreement is usually the main legal document in an acquisition because it sets out the final terms agreed between the buyer and seller. The type of agreement depends on how the transaction is structured.
In a share sale, the buyer purchases shares in the company that operates the business, usually under a Share Sale Agreement. The company itself generally continues to own its assets, employ its staff and remain a party to its contracts, while control of the company changes.
In a business or asset sale, the buyer purchases selected assets and parts of the business rather than the company itself, usually under a Business Sale Agreement or Asset Sale Agreement. These assets may include equipment, stock, intellectual property, goodwill and particular contracts. Contracts do not necessarily transfer automatically in an asset sale and may require assignment, novation or third-party consent. Depending on the transaction, the sale agreement may also address tax treatment, purchase-price adjustments, earn-outs, financing arrangements and transitional services to be provided by the seller after completion.
DISCLOSURE LETTER
A Disclosure Letter is commonly used alongside the Sale Agreement, particularly in share transactions. Its purpose is closely connected with warranties. A warranty is a contractual statement made by the seller about the business. For example, the seller might state that the company is not involved in any legal proceedings. If there is an existing dispute with a supplier, the seller may specifically disclose it. The Disclosure Letter records these exceptions to the warranties in the Sale Agreement.
Put simply, the Sale Agreement sets out what the seller is saying about the business, while the Disclosure Letter explains where there are exceptions. This gives the buyer more information about potential risks and can help the seller reduce the risk of later claims about matters that were properly disclosed. The effect of a disclosure will depend on the wording of the sale agreement and the quality of the information provided.
REGULATORY APPROVALS
Some acquisitions require regulatory approval before they can proceed. Under Australia’s current merger-control regime, an acquisition that meets the applicable notification thresholds and is not exempt must be notified to the Australian Competition and Consumer Commission (ACCC). The parties must obtain ACCC approval before putting a notified acquisition into effect. Alternatively, they may apply for a notification waiver. If a waiver is granted, the acquisition is not required to be notified.
Other approvals may also be relevant. Depending on the identity of the investor and the nature and value of the transaction, a foreign person may need to notify the Treasurer and obtain approval under Australia’s foreign investment framework before proceeding. Acquisitions in regulated industries may also require consent from an industry regulator or government body. The necessary approvals, and responsibility for obtaining them, are usually identified during due diligence and addressed as conditions in the sale agreement.
EMPLOYMENT AND MANAGEMENT DOCUMENTS
The treatment of employees depends partly on whether the transaction is a share sale or a business or asset sale. In a share sale, the employing company ordinarily remains the same, so employment generally continues despite the change in the company’s ownership. However, new or amended employment, consultancy or management agreements may still be required where a founder, director or key employee will remain involved on different terms after completion.
In a business or asset sale, employees generally do not transfer automatically with the assets. The buyer may offer employment to some or all employees, and the transfer-of-business rules in Part 2-8 of the Fair Work Act 2009 (Cth) may apply. These rules can affect whether enterprise agreements, certain awards and other instruments continue to cover transferring employees. The sale agreement should also address matters such as offers of employment, accrued entitlements, employee records and responsibility for termination or transition costs.
Employment, consultancy or management agreements may document a person’s ongoing role, salary or fees, responsibilities, confidentiality obligations and the period for which they will remain involved with the business.
RESTRAINT AND NON-COMPETE CLAUSES
A buyer may seek a restraint against the seller to protect the goodwill and customer relationships being acquired. For example, a seller restraint may restrict the seller from immediately establishing a competing business, approaching customers or suppliers, recruiting employees or using confidential information. These provisions are often included in the sale agreement because the buyer has paid for the goodwill of the business.
Seller restraints should be distinguished from ordinary employee non-compete clauses. An employee restraint generally seeks to protect interests arising from the employment relationship, such as confidential information or customer connections, rather than the purchased goodwill of an entire business. The context in which each restraint is given can therefore affect how it is assessed.
The enforceability of any restraint depends on the circumstances. Its restricted activities, duration and geographical area should go no further than is reasonably necessary to protect a legitimate business interest. Restraints should therefore be drafted for the particular transaction and the interests being protected.
COMPLETION DOCUMENTS AND POST-COMPLETION STEPS
Completion is the stage when the agreed transaction steps are carried out. Depending on the structure of the acquisition, the completion documents may include share transfer forms, asset assignments, contract assignments or novations, third-party consents, corporate resolutions, intellectual property assignments, releases of security interests and amendments to end the related registrations on the Personal Property Securities Register (PPSR), and updated company registers. Completion may also involve payment of the purchase price, delivery of business records and the appointment or resignation of directors.
The parties often use a completion checklist to ensure that each document, payment, consent and approval is dealt with in the correct order. Some matters may also need to be completed after settlement, including final purchase-price adjustments, transitional assistance, regulatory notifications and updates to business registrations or records.
For an Australian proprietary company, the company will generally need to update its register of members to record a share transfer and then notify the Australian Securities and Investments Commission (ASIC) of the relevant changes. ASIC must generally be notified within 28 days after the register is updated. Different requirements may apply to public companies or where the transaction involves other changes to the company’s share structure or officeholders.
Completion is therefore not limited to signing one document. It brings together the transfers, payments, approvals and records needed to give effect to the transaction, with some administrative and contractual steps continuing after completion.
CONCLUSION
No two business acquisitions are the same, and the documents, approvals and completion steps required will depend on the structure, size and circumstances of the deal. A straightforward asset purchase may require a different set of documents from a share acquisition involving employees, regulated assets, foreign investment or competition issues.
From protecting confidential information at the beginning of negotiations to investigating the business, recording the final terms and completing the transfer, each document and transaction stage serves a practical purpose. Identifying these requirements early can help buyers and sellers allocate risk, avoid delays and reduce the likelihood of misunderstandings or disputes.
HOW OPENLEGAL CAN HELP
Considering buying or selling a business? OpenLegal can assist with transaction structuring, due diligence and acquisition documents. Book a free 15-minute consultation with our customer care team.
Visit openlegal.com.au to learn more.
Shatik Dhawan | Legal Intern
This article provides general information only and does not constitute legal advice. The documents and legal requirements that apply will depend on the circumstances of each transaction. You should obtain advice about your situation.
