Buying or Selling a Business + Capital Raisings

THE SCALABLE AND SALEABLE PROGRAM

LEGALS

CREATING VALUEWolf of Wall Street – Jordan Belfort

How does an entrepreneur create value and sell that as an asset on exiting the business?

Most entrepreneurs don’t like running the business but love starting, building them and once up and running and selling them

Visionary – aim to build business in a way that makes it saleable

Scalable & Saleable - create value by finding the buyer/ investor who will pay the highest price

WHAT WE WILL BE COVERING TODAY

THE SCALABLE AND SALEABLE PROGRAM – WEEK 11

1.Types of start-ups

2.Creating Value - De-risking your business

3.Share sale or Asset Sale• Basics• Major characteristics• Overview – advantages/ disadvantages

4.Transactional Documents• Confidentiality Deeds: Issues to consider• Heads of agreement/ term sheets/ MoU

• Purpose• Key provisions• Enforceability – binding or not• Remedies

• Formal documentation – share sale/ asset sale

LEGALS – THE SCALABLE AND SALEABLE PROGRAM

6.Parties to agreement: acting for vendor/ purchaser

7.Liability:• Joint• Several• Joint & Several

8.Forms of consideration:• Cash / Scrip• Deferred PP/ Retention amounts• Earn-out provisions

9.Warranties

10.Fundraising by issue and sale of securities• General overview• 20/12/2 Rule• Raising Capital for a Proprietary company

1. START-UPS

Categorised in 4 ways depending on founder’s goal a. Scalable Business:

At outset set up to be capable of handling growth when opportunity or

demand arises/ created

Scale up business to enable rapid growth

To enable rapid growth need access to external funds – investments by venture capitalists

Correct structure in place to ensure adequate accountability, management

control and limit liabilities

Companies employ professional management, legal and financial advisors

Implement formal board structures and ensure contractual relationships with 3rd parties are watertight and limit company’s liability

Know and understand contractual and legal responsibilities

b. Saleable Business:

Est. with view to selling the business in the short term to a strategic buyer for a premium price

Attractive to buyer and able to operate without founder

Strategic buyers looking to grow by acquisition

Implement strategies to build value in the business and reduce risk

Est with structure to achieve return on investment

1. START-UPS

c. Small Business Entrepreneur:

Majority of small business owners

Owner’s vision is simply to improve current financial and lifestyle position and hopefully fund a reasonable retirement

Business strategy focused on developing steady growth and provides owner with wage + small profit

Little thought to how they will exit the business

Not spent time sufficiently preparing business for exit

No Succession Plan

1. START-UPS

d. Buying yourself a job:

Business provides same return as can earn in job + expense of overheads

Reliant on skills and knowledge of owner

Owner finds customers, services & takes care of management

Working in the business and not on it

Profits small enough to support owner

No solid wealth creation strategy

Can’t operate without owner

No succession plan

Exit likely a handover to person with similar skills not a sale

1. START-UPS

2. CREATING VALUE: DE-RISK Process of de-risking - removing risk factors from business - limits areas of exposure to uncertainty

Attracting outside investors / buyers – ‘getting investor ready’ Value from point of view of buyer/ investor

Reducing areas of exposure to uncertainty and risk

Increases chances of success and provides clarity in critical areas of the business Exposure to liabilities – prevent ‘skeletons in closet’ Investors – may have reasonable tolerance for risk but not welcome unnecessary risk

Pitching prematurely without de-risking

DE-RISKING YOUR BUSINESS De-risking business to maximise exit price or attract investment

Structural changes may build value for business – increase transparency + confidence Premium to acquire de-risked business

Process of 2 de-risking falls into 2 main areas:

Clarification

Change in substance

Clarification Change of substance

Formalising agreements/commercial /t&c

Selecting suppliers with lower risk

Understanding contractual relationships in place

Employment contracts

Implication of material clauses – change in control

Creating or revising written agreements with customers & suppliers

Formalising employee agreements:

protection of IP ownership of IP confidentiality & Restraints

Moving ad hoc sales to contracted revenue

Clarification Change of substance

Understand internal processes and reporting paths

Formalising and documenting internal processes

Clarifying credit terms & policies Protection of IP – copyrights, patents , designs

Key staff Key employee/ other insurance

Ensure all credit offered within reasonable trade terms - documented

Compliance Systems - ATO and ASIC

REDUCE POTENTIAL RISK AND LIABILITY

3. SHARE SALE OR ASSET SALE

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SHARE SALE OR ASSET SALE

Share sale – subject matter is the share capital of company that conducts the business Asset sale – subject matter is the specified assets acquired and liabilities assumed by purchaser

Share sale – Verify members, number and type of securities making up entire share capital

Identify options or convertible securities

Identify restriction i.e. pre-emptive rights or change in control right in constitution or shareholders deed

Purchaser indirectly acquire all assets and liabilities

Asset sale – Description of assets necessary to conduct business

Detailed schedules of fixed assets, IP and other assets

Broad general wording for assets owned and used by vendor in business

Excluded assets

ASSET SALE MAJOR CHARACTERISTICS

Only assets specified in sale agreement Liabilities remain with vendor

Contracts (supply agreements, customer contracts, property leases and finance agreements) of which Purchaser wishes to have benefit to be assigned or novated

Licences to be transferred – consent requirements

Employment agreements- redundancy/new contracts/ same terms

Accrued benefits – long term & sick leave benefits - deduction of purchase price

SHARE SALE MAJOR CHARACTERISTICS

Acquires all shares issued in target company Indirectly acquires all assets and liabilities All contracts remain with company – change in control clauses Licences for operation of business Company is employer of employees – continue

OVERVIEW: ADVANTAGES / DISADVANTAGESMatter Asset Sale Share Sale

Vendor/s • Vendor is usually the company or other

entity which carries on the business

• After the transaction vendor may not own

any substantive assets

•Purchaser may require the individual

shareholders and or directors personally to

give the warranties

•Mitigate risk in the event of a breach of

warranty following completion

Vendor will be the shareholders in the company

these may be individuals, companies or trusts

Liabilities • Purchaser only assumes liabilities of

Business specified in the sale document

• In absence of novation of contractual

obligations – 3rd parties have no recourse to

purchaser for company’s liabilities

•Purchaser usually assumes:

• accrued employee entitlements

• liabilities incurred post completion

•Purchaser acquiring the legal entity which carries

on the business – inherits all liabilities of company

• Extensive warranties relating to liabilities of

company

•Tax indemnity

•Release guarantees

Matter Asset Sale Share Sale

Assets • Only acquire assets specified in the

sale document

• Warranty that the assets are all of

those used in the business

•Warranty that company owns the

assets

•Assign or transfer each asset

•Charges, mortgages or other

encumbrances over the assets are

released - unencumbered

•Purchaser will indirectly acquire all of the assets

owned by the company

Contracts • Purchaser not acquire rights in

relation to contracts unless assigned or

novated

• Restriction – assignment - prior

written consent

• Purchaser - Condition Precedent

• Business premises – Landlord’s

consent

• Assignment not required

• Change in control clauses – leases

•Consent of 3rd party

•Condition Precedent


Employees • Identify employees to be employed

•Offers of employment

•Vendor may be liable for redundancy

payments

•Purchaser make offers on same or

substantially similar terms &

conditions to avoid redundancy

obligations.

•Purchaser usually assume leave

entitlements and for purpose of long

service leave, treat ‘yees service as

service with purchaser.

•Reduction of PP to recognise

Purchaser’s assumption of employee

entitlements

•Employees of business pass with company

•Change in control clauses


Licences • Licences required to operate

business

•Enquiries to identify required

licences/ regulatory authority

•Assignment of licences

•Fresh licences

•Key contracts/ CP

• Enquiries if company holds licence relevant to

conduct of business

• Change in ownership and control

•Consent requirements

•Relevant regulatory authority

•CP

•Legislation and comply with laws and relevant

conditions

Stamp Duty • Regulated by States & Territories-

where assets located

• Purchaser liable for stamp duty

• Duty payable at rates up to 6.75%

depending where assets located

• Acquisition of shares in company registered in NSW,

SA or ACT attract marketable security duty

• Rates of marketable security is 0.6%

• If company is land rich in any State or Territory the

acquisition of shares may attract land rich duty

depending on location of underlying land – 6.75%


Tax Losses • Tax losses remain with the vendor and

cannot be used by purchaser

• Tax losses may be carried forward and set off against

future profits of business, subject to satisfaction of loss

carry forward and utilisation rules

•Tax loss – total deductions exceed assessable and net

exempt income for the year

•Companies can generally carry forward a tax loss

indefinitely and deduct it in year of choosing, provided

they have, since loss was incurred, carried on the same

business

GST • Qualify as GST–Free sale of going

concern: Vendor must sell all things

necessary for the continued operation

of the enterprise and must carry on

enterprise until day of sale

• Written agreement that supply is of a

going concern

•If requirements not met, GST payable

on sale of assets and SD calculated

against GST inclusive price

•GST not payable on sale of shares provided certain

conditions met i.e. registration of Purchaser and Vendor

4. TRANSACTION DOCUMENTS

a. Confidentiality Deeds • Purchaser undertakes due diligence prior to formal documentation

• Sufficient information to evaluate business

• Vendor – concerned about level of information to be disclosed to purchaser, sensitive commercial data, trade secrets other confidential information

• Purchaser + advisers to enter into CA • Return and/or destroy

Confidentiality Deeds (cont.) Some issues to consider: • (Unilateral/Mutual):

• Obligations mutual or one way• Purchaser (recipient) agreed to be bound by obligations of confidentiality in

favour of Vendor (discloser)• Scrip consideration – reciprocal confidentiality undertakings

• (Scope):• Vendor will want the scope of information to be specified broadly• Purchaser will seek defined specific scope

• (Exceptions): Discloser to ensure that exceptions to confidentiality are sensible and appropriately defined i.e.• Information in public domain• Required by law i.e. listed company may require response to market rumour

ASX LR 3.1B


Confidentiality Deeds (cont.)

• (Recipients): Determine to whom recipient may disclose the confidential information i.e. Advisers - limit and define.

•(Auction Sale):

• Number of bidders – potential purchaser• Each bidder enter into CA• Ultimate purchaser require assignment of each of bidder’s CA at completion to

enable it to enforce obligations of confidentiality

•(Exclusivity Undertakings): No Shop/ No Talk

• No shop – Vendor agrees not to solicit offers from 3rd party during agreed period

• No talk – Vendor agrees not to negotiate with any other bidders – whether approach solicited or not - subject to fiduciary carve-out

• Fiduciary carve out - directors may respond positively to a better offer if form view that in ‘best interests’ of company/ shareholders ‘

• Standstill – not acquire securities in target for agreed period


•(Insider Trading):

• Listed Company mindful of offence of ‘tipping’ – communication of price sensitive information to persons likely to trade in the securities

• If disclosing insider information, vendor include a standstill period during which recipients undertake not to deal in the securities during standstill period


b. Heads of Agreement/ Letters of Intent/ Term Sheets - Informal preliminary documents

Purpose: Record agreed legal + commercial terms Preparation and negotiation of acquisition documents Structure for negotiation of formal acquisition documents Assist in drafting contracts Continue negotiations in good faith

Key Provisions: Purpose Confidentiality (regard to existing CAs) Negotiation of contracts Exclusivity Responsibility for costs Break fees (1% of enterprise value) Time table - road map for transaction

• Access/ due diligence rights• Major commercial terms


•Enforceability

When drafting an agreement consider whether or not agreement (in whole or in part) is legally enforceable

General Principle - Courts will not enforce an agreement to agree - Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982)149 CLR 600

Case law to assess when parties in negotiation reach agreement and agree that a formal contract will follow:


Category of situation identifiable from case law Status

Agreement on terms of contract and agree to be immediately bound but wish to restate terms in formal contract

Binding Contract

Final agreement on all material terms and intend not to depart from them- performance conditional on execution of formal document

Binding Contract

Agree to be bound immediately and exclusively by terms but expect to make a further contract in substitution containing by consent additional terms

Binding Contract

Express agreement on a key term i.e. price and parties confident that they will in due course agree on other material terms

No binding Contract

•Subject to Contract • ‘subject to contract ’ or ‘subject to formal preparation of contract’ –intention is

that neither party is contractually bound until formal contract executed – Masters v Cameron (1954) 91 CLR 353

• Must explicitly state that informal agreement or parts of it are legally binding

• Coal Cliff Collieries v Sijehama (1991) 24 NSWLR, Kirby P lists features indicative of a binding agreement in context of HoA providing for negotiation in good faith:

• Formal nature of the document – words such as ‘agreement’

• Certain of the provisions being immediately enforceable

• Identify 3rd party empowered to settle uncertainties or disputes


Kirby P also listed features as indicative that a HoA was merely an ‘agreement to agree’ and not legally enforceable:

• Vague undertaking – ‘proceed in good faith and consult together’

• Formulation of more comprehensive agreement yet to be negotiated

• Contemplated that ‘fresh or additional’ terms to be agreed upon i.e. terms in HoA open to negotiation not intended to be binding

• ‘Proposal’ – commitment for future not presently legally binding

• Absence of dispute resolution clause

• Nature of document


•Non–contractual remedies

• When Informal Agreement not directly enforceable - estoppel and restitution may allow Court to grant relief

• loose or incomplete agreement acted/ relied upon

i. Estoppel:

• Incurred a detriment

• Acting on reasonable reliance that valid contract is or is about to be formed/ fact

• Justice requires enforcement of the promise

Invoke estoppel to prevent other party reneging – held to representation


ii. Restitution:

• Party who has conferred a benefit on another in anticipation of valid contract which does not materialise

• May claim in restitution for the return of its benefit or its value

•Summary:

• Clear of intention - document or particular provisions legally binding

• If intention that no binding agreement until formal documents settled, then provisions relating to:• confidentiality• exclusivity• break fees• due diligence rights and• costs

Make intentions clear – Obligations to be legally enforceable


Share Sale –core docs

• SSA

• PoA – appointing buyer pending registration of shares

• Share Transfer Form

• Share Certificate

• Consents to act as director, secretary, member, registered office & public officer

• Resignations - directors

• ASIC Form 484 – change of company details

Asset Sale –core docs

• ASA

• Deeds of release (charge over asset)

• Novation Deed

• Assignment Deed

• Escrow Deed – escrow of Purchase money

C. Core Sale Documents

6. PARTIES TO AGREEMENT

a. Acting for Purchaser:

• Ensure all vendors are bounds to agreement

• Have regard to structure of vendor/s i.e. individuals, trusts, funds or PE vendors

• Different types profiles/ corporate structures

• Indemnities, warranties and post completion liability structure

• Existence during warranty period

• Vendors to be jointly & severally liable under sale agreement – determine early on

• Vendors’ credit worthiness if breach of warranty

• Funds to meet claim for breach of warranty post-completion

• Purchaser look to Warrantor/s – entity/person standing behind the warranties

• Alternative means where parties lack creditworthiness – pay portion of purchase price into escrow

• Payment deferred and paid following expiry of certain time periods or secured by Bank Guarantee

b. Acting for Vendors:

•(Newco):

• Purchaser form newco to purchase assets/ shares• No comfort that can satisfy claims – substance

•(Lack of credit support):

• PE vehicles/ funds typically do not provide deposits or any credit support at signing• Subject to finance


• Typically vendors would not accept ‘subject to finance’ condition

• Market practice for sales to PE buyers for vendors to accept credit risk

• Comfort – reputation in market

• Not PE deals – parents or related entities guarantee purchasers obligations to pay purchase price


7. LIABILITY

Joint Liability:

• legal responsibility attracted by 2+ individuals for loss to 3rd party• Recover whole amount of loss from each party in same amount

Several Liability:

• Legal responsibility capable of being severed• Each party individually responsible for their contribution to loss

Joint & Several Liability:

• No matter how many wrongdoers the court identifies, successful party can call upon one to meet full amount of claim

Common Law joint liability is implied –override with express contractual term

•Purchaser will want vendors to be jointly & severally liable so that it can sue any single vendor

•Recover whole loss leaving vendor to seek contribution from other vendors

•Vendors can sign a deed of contribution amongst themselves regarding cross liability – vendors may agree to cap liability to respective proportion of purchase price

•Vendors counter-argument – not take risk on the solvency of other vendors not related to it

•Often agreed position: joint & several liability with vendor’s liability capped at respective proportion of purchase price

7. LIABILITY

8. FORMS OF CONSIDERATIONa. Cash:• Currency

• Permitted method of payment:• Electronic transfer in Real Time Gross Settlement – RTGS• Payment by Bank cheque• Escrow arrangement

• ‘Cleared funds’ before completion• Cash or RTGS

b. Shares/ Scrip:• Part or all of purchase price may be satisfied by scrip – issue of shares in purchaser

or related body corporate of purchaser

• Completion obligations incl. issuing or procuring the issue of shares to vendor

• Vendor usually conduct due diligence on purchaser & require warranties

c. Deferred Purchase Price/ Retention Amounts:

• Portion of purchase price may only become payable on a date after completion

• Purpose – allow purchaser to set off against deferred component of PP any warranty claims or other amounts falling due in period from completion until date deferred component of PP becomes due

• Purchaser becomes contingent creditor of the vendor – risk of insolvency or non-payment (credit risk)

• Address issue by payment of deferred component of PP to escrow agent to hold until parties entitlements established

• Purchaser entitled to set off against deferred PP the amount of any warranty claim

• Vendor will want to prescribe when warranty claim has been sufficiently established to permit deduction

8. FORMS OF CONSIDERATION

• Vendor will want to narrow circumstances:

• Agreed liability for breach of warranty or other liability under sale agreement

• Judgment by Court confirming liability


d. Earn-Out Provisions:

• Agree that deferred component of PP is conditional on/ calculated on basis of performance of acquired business in agreed period i.e. 1 yr post completion – Earn Out Period

• Sale agreement set out how to measure performance of business:

• Revenue• Earnings i.e. net profit before tax, EBIT or EBITDA

• Sale agreement specify process for determining financial performance, agreed accounting principles and dispute resolution


9. WARRANTIES

a. What is a warranty?

• Express/ implied promise that certain facts are as represented

• Sale agreement - express terms represent entire agreement

• Implied warranties or representations are excluded

• Purchaser receives little protection under law – caveat emptor ‘buyer beware’

• Purchaser takes on risk

• Minimise/ allocate risk –assurances from vendor in form of warranties & representations as to assets and business & in share sale, undisclosed liabilities

b. Scope of warranty

• Depends on whether asset sale or share sale

• Both types of agreements incl. warranties in relation to identity of vendors and ability to enter into transaction

• Most negotiated sections of sale agreement

• Vendors wish to limit warranties to which feel comfortable giving from own knowledge

• Purchaser broad warranties

• Scope of warranties may be limited based on how comprehensive DD investigations have been

• However, DD investigations usually based on material provided by vendors

• Even where purchaser conducts DD, still justifiable to for purchaser to seek warranty protection

9. WARRANTIES

• SSA contain more extensive warranties than under ASA

• In asset sale, warranties sought usually those that effect value to which parties attribute to the assets

• Examples:• The assets• Ownership of assets• Licences – to be transferred• IP – ownership/ transfer• Contracts

• In share sale – scope more extensive & detailed

• Purchaser seek warranties in relation to assets of business, shares, capacity of vendors & liabilities of company

• Examples:• Financial and other commitments of company• Share capital of company• Trading arrangements, indemnities, guarantees, licences, consents

9. WARRANTIES

• Employees – employee benefits• Litigation• Insurances• Taxation – purchaser insist on indemnity in relation to tax liabilities

• Person/ entity who gives warranties – Warrantor

• Seek warranties from persons who have economic interest in sale or sufficient substance to minimise credit risk over warranty period

• Ability to compensate for any damages in event of breach of warranty

• Nature of vendors i.e. individual, company, trust or partnership to determine who provides warranties

• Concerns about creditworthiness of warrantor – Hold back portion of PP in escrow or deferred PP

9. WARRANTIES

• Amount of claim for breach of warranty deducted from amount held in escrow or deducted from amount of deferred PP

• Escrow amount released or deferred payment paid on expiry of warranty period – takes into account any claims notified but not settled at completion

c. Date of application of warranties

• Time interval between executing sale document and completion

• CP to be satisfied before completion

• During interval period, vendor continues to operate the business

• Sale agreement – restrictions on way business to be operated

• Purchaser require warranties to apply at date of execution of contract and at completion

• During interval period, warrantors promptly disclose in writing circumstance that may result in warranty claim

9. WARRANTIES

d. Purchaser’s Remedies for Breach

• A breach of warranty entitles purchaser to claim damages for loss subject to rules relating to remoteness of damage & duty to mitigate loss

• Place claimant in position it would have been in had warranties been true

• Calculated by deducting from market value that business would have had if the warranty had been true, the actual market value of the business

• Market value of the business, if warranties had been true, will generally be the price paid for the business or shares

• Hurdles, baskets & caps

9. WARRANTIES

•Key Difference Between Warranty & Indemnity

• Purchaser prohibited from claiming damages for breach of warranty for loss preventable by reasonable mitigating action

• Key difference between warranty & indemnity is that under an indemnity there is no duty to mitigate loss and concepts of causation and remoteness do not apply

• Indemnity – a promise to reimburse indemnified person should a particular liability arise – warranty on indemnity basis

• Purchaser push for wide all encompassing definition

• Vendor seek to confine concept

• Purchaser require indemnity to cover total amount of loss + costs + interest + penalties i.e. purchaser insist on tax indemnity

• Tax indemnity not usually qualified by reference to disclosures in DD process, not subject to min. claim limits but apply ‘dollar for dollar’ basis in respect of any tax for period pre-completion

9. WARRANTIES

•Qualification of Warranty

• Warranties customarily qualified by anything disclosed in disclosure letter, sale agreement, DD material and information available for inspection in public records

• Sale agreement define meaning of a reference to,’ except as disclosed’

• Acting for vendor – anything disclosed in relevant disclosure material

• Acting for Purchaser – reference confined to anything fully & fairly disclosed in such a way that quantum & risk is reasonably apparent from the disclosure material

• Both parties should keep detailed records of information provided throughout sale process including DDQ, responses, RFI

• Vendor ensure information described in sufficient detail

• Purchaser ensure that received material information

9. WARRANTIES

e. Time Limits

• Sale document include time limits on warranty claims

• Warrantors not liable unless receives notice of claim within specified time

• Purchaser seek extended periods for claims regarding tax – usually 4yrs after relevant tax yr

• Warranties customarily qualified by anything disclosed in disclosure letter, sale agreement, DD material and information available for inspection in public records

9. WARRANTIES

10. COMPLETION

Completion – Point at which (and process by which) title to the assets or shares is transferred to purchaser and vendor receives payment

• Completion deliverables to be delivered on completion by both parties

• Fulfilment of all conditions precedent and to occur within agreed no. of days of that happening

• Common mistake to under resource the completion process

• Completion checklist

10. FUNDRAISING

a. General: (Very brief overview of 20/12/2 Rule)

• Small companies need capital to get started

• What are options if don’t have it & banks won’t lend it?

• Venture capital, seed capital, investment capital, private equity – money to grow your business in exchange for equity

• Companies raise funds by issuing shares and borrowing and issuing debentures

• Trusts raise funds by issuing units (capital/income units) and also borrowing

• Investors require sufficient information to assess value of securities and make rational investment decisions

•Value of securities determined by the rights they confer – rights to income or capital distributions from a business

•Value depends on assessing value of the enterprise

•Because of intrinsic connection between information and value of securities, the law requires issuer to disclose information which a reasonable investor would require to make an investment decision

•Fundraising and disclosure requirements regulating offer of securities in Australia - Chapter 6D of the Corporations Act (Cth) 2001 •Fundraising provisions ensure that investors have access to the information which a reasonable investor would require for the purpose of making an investment decision

•‘Reasonable Investor’ standard – general disclosure standard

10. FUNDRAISING

• Section 113(3) of CA: proprietary company must not engage in any activity

that would require disclosure to investors under Chpt 6D of CA, except for an offer of its shares to:

• Existing shareholders of company; or

• Employees of the company.

b. General proposition : Disclosure

Person must not make an offer of securities that needs disclosure to investors until a disclosure document for the offer has been lodged with Australian Securities and Investments Commission (ASIC) – unless offer is exempt from disclosure (sections 708/708A & 708AA)

As long as investors are given access to all material information, it is up to them to decide how to use that information and to accept the risks in investing

10. FUNDRAISING

b. Offers that do not need disclosure:

• Section 708 CA sets out 15 kinds of offers that do not need disclosure

• Most of the exclusions relate to circumstances where those who receive offers are in a position to take care of themselves and do not need the degree of mandatory disclosure which Chp 6D provides

• This reasoning does not apply to small scale offerings - where the justification for the exclusion seems to be the concept that a disclosure document is not required for a private/personal offer

• The offeree in position to make inquiries of the offeror face-to-face and the cost of disclosure document is disproportionately high

10. FUNDRAISING

• One of the exceptions for disclosure for the issue of securities by a company is ‘Small scale offerings – personal offers’

c. Small Scale Offerings: 20/12/ 2 Rule • The 20/12/2 Rule under section 708(1) of the Corporations Act (Cth) 2001

allow entrepreneurs to raise up to $2m over any 12 month period from up to 20 retail investors

• ‘Personal offer’ – individual offer made to person known to be interested in the offer

10. FUNDRAISING

Difference between a Retail and a Wholesale Investor:

• Wholesale investor defined as an individual/ investing entity that meets one or more of the following tests:

• Net assets of more than A$2.5 million

• Has income of more than A$250K over last 2 FY

• Is investing A$500K or more into the business

• Retail investor is simply everyone else who doesn’t meet above test

• No limit on how much and how often you can raise funds from wholesale investors – exempt from 20/12/2 Rule

• ASIC requires wholesale investors to deliver a certificate – signed by investor’s accountants

10. FUNDRAISING

d. Raising Capital for a Private Company:

i. The Power:

•The directors hold power to decide to raise equity capital , subjectto qualifications:

• Constitution of company

• new shares first offered to existing shareholders • existing shareholders consent• anti-dilution provisions

• Shareholders Deed – regulates issue of further securities

• Terms of issue of existing securities i.e. preference shares may restrict further issue of shares having equal or better rights

• Power always exercised in good faith in best interest of company

• Good commercial reasons for decision

10. FUNDRAISING

• Implementation not unfairly prejudice existing shareholders

ii. The Securities:

• Various forms of securities to choose from

• Different rights, rewards and risk profiles for investor + taxation treatment of dividends and capital gains

A. Ordinary Share

• right to vote at general meeting

• right to receive annual financial statements

• right to participate in dividends if declared on a winding up, a right to the return of the capital paid on the share

10. FUNDRAISING

B. Preference Share

• Limited right to vote at GM a right to participate in dividends (if any) the company pays up to a maximum rate

• It is ‘preferred’ because the rights to payment of dividend and return of capital have priority over an ordinary share

C. Convertible Note

• A loan to the company that carries a right for the noteholder to convert all or some of the loan into ordinary or preference shares

• Loan may be secured by a mortgage over the company’s assets or unsecured and usually bears a low interest rate that recognises the benefit the noteholder has in being entitled to later convert the loan into equity

• Noteholder becomes a creditor of the company

10. FUNDRAISING

D. Option• A right to be issued with ordinary or preference shares in the future if

optionholder so chooses and exercises the option before an agreed period of time

iii Liability

• Although no formal disclosure document

• The law still gives remedies to an investor who was subject to misleading or deceptive conduct in the fundraising

• This could arise from inadequacies in any informal information

memorandum put out or even in a response to a verbal queries from the investor about the position or prospects of the company

• Seek legal advice early on in the process

10. FUNDRAISING

11. CONCLUDING COMMENTS

Buying or Selling a Business + Capital Raisings

Documents

Transcript of Buying or Selling a Business + Capital Raisings