2018/2019 Opportunities: Australian Business Acquisitions and Equity Investments
Investor activity and economics in Australia
2018 and 2019 appear to be great years for overseas investment in Australian businesses. We are seeing a lot of overseas investor activity here. Against the US Dollar, the Australian Dollar (valued, at the time of writing, at 0.72 USD) has depreciated by over 10% since the end of January 2018 but it may be subject to upward pressure soon, including if the Reserve Bank of Australia starts lifting interest rates. 85% of Finder’s (www.finder.com.au) surveyed analysts expect the next RBA interest rate move to be up, probably in the second half of 2019. No doubt, some of you or your clients will be looking at Australian businesses with increasing interest.
Significantly, our technology driven businesses are maturing and related expertise in Australia is highly regarded.
As many of you know, acquiring or investing in assets or shares in, or providing unsecured convertible loans to, private Australian companies and businesses is very similar to other common law countries and can be done here quickly and efficiently.
Acquisitions of private Australian company shares and businesses are generally documented primarily by a Share Purchase Agreement or Asset Purchase Agreement together with specific transfer documents for the relevant share and assets. Often, we can adapt agreements drafted in overseas markets at low cost for use in the Australian market. However, if you prefer, we also have a number of Australian templates which are drafted specifically for our market.
Our usual position on warranties and indemnities sits somewhere between typical approaches in the United States and the United Kingdom but our market understands and can accommodate these approaches. We also use a lot of Warranty & Indemnity Insurance in Australia.
Investments in private Australian companies are frequently documented by Subscription Agreements (including with conditions, warranties and termination rights) and Convertible Loan Agreements (including with usual loan terms, investor rights and share conversion mechanisms).
The affairs of Australian companies and their shareholders are typically managed by Shareholders Agreements (if there are two or more shareholders) and Constitutions. Our Constitutions are similar to Articles of Association (as used in the UK) and reflect or streamline the default requirements of our Corporations Act. These Constitutions often set out the rights of different classes of shares including ordinary shares, redeemable and non-redeemable preference shares and non-voting shares (including shares arising from the conversion of unsecured loans or bonds).
We can tailor Shareholders Agreements specifically to investors’ requirements which often include express rights in connection with the composition of boards, significant decision making, funding, transfers of shares, loans and exits as well as the provision of information to investors. We also take care to ensure that they work well in conjunction with share and option plans.
Limited foreign investment and merger restrictions
In general, proposals to acquire an interest of 20 per cent or more in any business valued at over $261 million (or the higher threshold of $1,134 million for investors from Chile, China, Japan, Korea, Singapore, New Zealand and the United States) require prior approval (these amounts are regularly increased) by the Federal Government. In addition, all “foreign government investors” require approval to acquire an interest in an Australian entity or business (or to start a new Australian business), and all foreign persons must get approval to make investments of at least 5 per cent in an Australian media business, in each case regardless of the value of the investment (ie a $0 threshold). We can prepare and submit the relevant applications for overseas investors, including foreign government investors, quickly and efficiently.
In Australia, business acquisitions or investments are prohibited if they would have the effect (or be likely to have the effect) of substantially lessening competition in a market. Various related matters must be taken into account including the following: (a) the actual and potential level of import competition in the market; (b) the height of barriers to entry to the market; (c) the level of concentration in the market; (d) the degree of countervailing power in the market; (e) the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins; (f) the extent to which substitutes are available in the market or are likely to be available in the market; (g) the dynamic characteristics of the market, including growth, innovation and product differentiation; (h) the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and (i) the nature and extent of vertical integration in the market.
If you consider that a proposed business acquisition or investment may have the effect, or be likely to have the effect, of substantially lessening competition in an Australian market, then we can advise you on the best way to proceed. Australian media sector acquisitions and investments are the subject of an additional regime and, again, we can assist you with this.