US acquisitions in Australia: issues to consider from a US and Australian perspective

By Steve Johns, Deborah Chew, Jacqui Barrett and Eliza Unger

This article summarises some of the issues to be aware of when considering an M&A transaction involving a US buyer and an Australian target. Issues can arise at each stage of the transaction, so it is important to be aware of the issues to avoid any unnecessary delay or risk.

Introduction

Australia is an attractive destination for US capital.

Australia’s political environment, strong legal and regulatory framework, highly educated and skilled workforce and investment friendly policies make it an attractive place in which to acquire a business.

These factors, together with Australia’s strategic location and shared cultural values with the US, have led to more and more US companies to acquire Australian businesses.

This article summarises some of the issues to be aware of when considering an acquisition involving a US buyer and an Australian target. In particular, it considers the differences between the two countries in terms of transaction documents, law, market practice and risk. It also looks at certain Australian specific issues – such as foreign investment rules.

The buyer

Although the buyer parent may be US-based, for tax and other reasons it is likely that the actual buyer will be a subsidiary entity (and often a special purpose vehicle incorporated in Australia). For that reason, it is likely that the seller will require that the actual buyer either has assets to meet any claim under the transaction documents (or that its obligations are appropriately guaranteed by the US buyer parent).

Also, although incorporating an Australian entity is not difficult, the requirement that the entity has an Australian resident director, as well as for all directors to have a Director Identification Number (including foreign directors) can make the process time consuming.

US advisers

In some cases, a transaction involving a US buyer may require the seller to engage US advisers (eg. lawyers and tax advisers). Ultimately, the identity and role of the advisers will depend on, among other things, the transaction (including transaction type, complexity and size) and governing law.

If US advisers are required, this should be factored into transaction costs (after taking into account the relevant exchange rate).

Foreign investment approval

US buyers will need to consider if the approval of the Australian Foreign Investment Review Board (FIRB) is required prior to acquiring the Australian business (even if the actual buying entity is an Australian incorporated subsidiary, due to the relevant tracing provisions).

FIRB serves a similar purpose to the Committee on Foreign Investment in the United States (CFIUS). However, FIRB has a larger scope of inquiry and, unlike CFIUS, is not limited to considering security implications only.

If FIRB approval is required, it will typically be a condition to completion of the sale agreement. This can create additional delay and deal uncertainty for the seller, which can be a factor in a competitive bidding process.

In addition, US buyers may also need to register the acquisition in the Register of Foreign Ownership of Australian Assets.

Transaction documents

There are significant differences between Australian share sale agreements and US share sale agreements. Some key differences are set out below.

Customary practice

US and Australian custom differs when it comes to transaction documents (eg. in relation to limitations and hold backs). That can be problematic when negotiating term sheets (or other shorter form documents) which often contain clauses to the effect that customary provisions will be included in the long form documents. In such cases, it is important to ensure the parties understand what ‘customary’ means.

Conditionality

US share sale agreements are typically more conditional than Australian agreements. Conditions to completion in US share sale agreements typically include:

• no material adverse effect having occurred;
• no breach of representation or warranty having occurred; and
• no breach of the share sale agreement having occurred.

It is uncommon to find all of these conditions in an Australian share sale agreement for a private company. In Australian share sale agreements, the buyer typically assumes more pre-completion risk than US share sale agreements.

Content

Although the content of Australian share sale agreements and US share sale agreements are similar in many respects, the way that some issues are treated varies due to differences in law between the two countries. For example, workplace laws in Australia are substantially different to US laws and Australia is generally seen as a more employee-friendly jurisdiction. This can lead to more extensive employment-related warranties in Australian share sale agreements than US agreements.

Disclosure against warranties

Australian share sale agreements provide for matters disclosed in due diligence (typically the contents of the data room) to qualify the representations and warranties (other than, in some cases, fundamental warranties). This is not the case in US share sale agreements, where only documents and matters specifically listed in a schedule or a disclosure letter qualify the representations and warranties. As a consequence, Australian share sale agreements are typically seen as more seller friendly.

Drafting and structure

Australian and US share sale agreements are structured differently. Often Australian agreements are drafted in a more ‘plain English’ style and conditions and definitions are located at the beginning of the document.

US share sale agreements are stylistically different from Australian share sale agreements, eg. US share sale agreements tend to combine a number of concepts in one clause and document limitations of liability and indemnities differently.

In our experience, these differences, combined with a different structure, can mean Australian lawyers find US share sale agreements time consuming to read.

Applicable law and enforcement

The governing law of transaction documents needs to be considered carefully. As a rule, defending (or prosecuting) claims in the US is more time consuming and costly than doing so in Australia. Further, while a judgment obtained in the US cannot be enforced through the statutory regime in Australia, certain judgments obtained in the US can be enforced under the common law without having to re-litigate the matter.

Execution of documents

The US does not have the equivalent of s127 of the Corporations Act 2001 (Cth) (execution of documents by company officers). Typically, documents will be executed by an authorised representative of the company. If there is any doubt as to the authority of a person to execute any document, a copy of the board minute of the relevant company (together with accompanying certificate) should be requested.

Other minor differences

Finally, while it may seem like a relatively insignificant issue, the US has different holidays from Australia (eg Thanksgiving Day). This should always be considered when agreeing to deal timelines and the timing of deliverables under any transaction document. Failure to do so can result in unintended consequences.