Enforceable restrictions following sales of Australian businesses to overseas investors

We are seeing a lot more activity from overseas companies and investors who are buying or investing in privately owned Australian businesses.

Background

Australia has a relatively safe economic and regulatory environment for overseas buyers and investors. In many instances, our laws are not significantly different from those of other common law countries.

We do have some competition and foreign investment restrictions. In addition, like with other countries, tax planning of acquisitions and investments is strongly recommended. For example, to help relevant Sellers and potentially make your offer more attractive if they will be receiving equity in your company, it is worthwhile considering at an early stage (together with your usual considerations) the availability to them of Capital Gains Tax “roll over relief” in Australia. This may refine your approach and documentation (including the initial offer letter or term sheet).

Avoiding competition and disruption

One common question from new entrants to the Australian market is how to ensure that Sellers and critical employees of a business remain loyal and do not compete with or disrupt a business after a sale to, or investment by, an overseas company. This is discussed below.

Share and option plans

Share and option plans, with favourable tax treatments, are frequently used to encourage employee loyalty and retention. These plans are often similar to those used in the US and UK markets, but subject to specific tax and accounting considerations. We can tailor these to your particular requirements, including specific time or performance based vesting criteria. Often the value of any unvested shares or options is reduced or eliminated on the termination of any relevant employment.

Non-compete and non-solicitation provisions

Non-compete and non-solicitation provisions are commonly used in a variety of documents. We discuss these in more detail below.

Depending on the continuing involvement of the Sellers and employees following a business sale or investment, you may require competition and similar restrictions to be included in the Sale Agreement and other documents such as Employment Agreements and a Shareholders (or Stockholders) Agreement.

Sale Agreement

The Share Sale Agreement, Asset Sale Agreement or Business Sale Agreement will often contain competition and similar restrictions on the Sellers. Like other countries, typically they might include requirements not to:

  1. compete with the business being sold,

  2. take employees from the business,

  3. take customers from the business, or

  4. interfere with suppliers of the business.

Australian courts often enforce these kinds of restrictions in Sale Agreements to the extent that a link can be drawn between the restriction and the goodwill of the business and the restriction is reasonable in the circumstances. Australian courts have shown a greater willingness to uphold seller-buyer restrictions in Sale Agreements than similar restrictions contained in employment contracts.

Generally, 5 years after completion of the sale is the longest duration of these kinds of restrictions that we typically see in Australia. The Australian courts will also carefully consider the geographic scope of the restrictions. The primary consideration for the duration and geographic scope is what is reasonable to protect the goodwill of the business.

These kinds of restrictions in the State of New South Wales may be read down or amended by a court in order to make them enforceable.

As courts in other States in Australia do not read down or amend restraint of trade clauses, the restrictions are often drafted as “cascading clauses”.

Cascading clauses provide multiple alternatives (and combinations of alternatives) based on the nature, duration and geographic scope of the restriction, often on a reducing basis in the case of unenforceability.

Employment agreements

Often buyers and investors will allow employees of Australian businesses to continue to be employed on the same terms. However, in some instances, such as for critical employees or staff without satisfactory employment arrangements, new employment agreements may be required to take effect on completion of the sale or investment.

These new employment agreements often include competition and other restrictions which are similar in scope to those in a Sale Agreement (except for their duration) as well as provisions to ensure that relevant intellectual property rights are owned by, or transferred by the employee to, the employer.

Australian courts are reluctant to enforce restrictions against employees unless they have significant customer or staff connections so they rarely apply for more than a year after termination of the employment. Depending on the role of the employees and other circumstances, shorter periods and narrower scopes of restrictions would be more typical.

Fixed term agreements

We tend not to engage employees for long durations under fixed term agreements because of the potential need to pay out the balance of their term after termination. However, these agreements can be provided if required.

Shareholders (or Stockholders) Agreements

For partial business sales or if equity is being issued to staff, Shareholders (or Stockholders) Agreements are often required to govern the affairs of the business (and its holding company) and usually contain similar competition and other restrictions. These restrictions will typically apply during the period of (continuing) equity ownership by the Sellers or staff and for a period of up to, say, 3 years after that ownership or relevant employment ceases. Australian courts may be more likely to enforce these restrictions (if they arise in a context other than employment arrangements) but could take account of matters such as the extent of the continuing involvement in the business, and any payments received on the sale of interests, by the Sellers or staff.

While many of these issues will be familiar to overseas lawyers, it is important to engage the advice of experienced local lawyers to maximise the enforceability of your proposed competition and similar restrictions.

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