Meridian lawyers Commercial insights

Commercial insightsSummer 2015

Insights Editor: Georgina Odell, Senior Associate T 02 9018 9975 E [email protected]

This edition of Commercial insights includes a ‘must-read’ for anyone considering buying a business. This article overviews the process from due diligence to completion of the sale – the purchase process will be considered in more detail in our next edition. Also in this edition, why you really should make a will.

Buying a business: an overview 1

Transfer of a business: what happens to the employees? 4

Keeping it confidential: Privacy issues when buying or selling a business 6

Federal Court decision on franchisor’s unconscionable conduct 6

Why you should make a will 8

COMMERCIAL LAW

Buying a business: an overviewSo you have found a business to buy, agreed the price in principle and have the funding to proceed, but don’t know what happens next? Here is a brief overview of the legal process involved in buying a business.

By Mark Fitzgerald, Principal

T 03 9810 6767E [email protected] diligence

As a first step, ask your accountant to undertake financial due diligence and assist you in negotiating the price.

You will need to instruct a solicitor to act for you in the purchase. It is helpful if your accountant and solicitor liaise regarding the purchase terms and any perceived risks. Usually the seller, through its business broker, will ask the buyer to make an offer using a short form ‘heads of agreement.’ Make sure you ask your solicitor to check this — it should be non-binding and subject to completion of due diligence to your satisfaction.

Your solicitor will engage with the seller’s solicitor and ask for further information where it has not been provided as an attachment to the draft contract. This process is sometimes referred to as the legal due diligence process during which your solicitor checks that you are buying what you thought you were buying, that the seller actually owns all of the assets of the business being transferred (including items such as the lease, the intellectual property [trade marks etc], the stock and the assets).

Your solicitor will undertake property searches and searches of the Personal Properties and Securities Register to ascertain what security interests are registered


page 2 | Commercial insights

over the business and assets. These must be discharged on completion so that clear title is transferred to you. This process is similar to that of discharging a mortgage over a house when a new buyer completes the purchase.

Agreement with your partnerIf you are buying with a partner, consider the benefits of negotiating a partnership agreement governing your relationship, with effect from settlement of the purchase. A partnership agreement would cover issues such as how the business is to be run, how much time each of you will devote to the business, profit shares, voting rights, and what is to happen to the business if one of you resigns, retires or dies.

Exchange of contractsGenerally, contracts for the sale of a business are prepared by the seller’s solicitor because the seller has the relevant business information and documentation that is needed to put the contract together. A seller will often be referred to as the vendor in the documentation. The contract will often be in a standard format, for example, in New South Wales, the Law Society Sale of Business Contract 2004 is commonly used as the basic agreement, with special conditions tailored to the particular business being purchased. In Victoria, the standard format is the Sale of Business Contract endorsed by the Real Estate Institute of Victoria and the Law Institute of Victoria.

The contract sets out procedures for dealing with the transfer of any lease of the premises and the obtaining of consents required, such as consents to assignment of the lease from the landlord.

Contracts for the sale of a business will often contain conditions precedent, which are requirements that must be satisfied before you will be legally obliged to complete the purchase. The obtaining of all necessary consents in relation to the lease are important conditions precedent, as are the requirements for transfer of any licences essential to the business (such as liquor licences, or franchisor approvals). You should make sure you are satisfied your finance has been formally approved and that you can satisfy all financial conditions, or make the contract ‘subject to finance.’

It is important for you and your solicitor to carefully review the contract prepared by the seller’s solicitor. In particular, the contract should include a range of seller warranties, and the seller (and its principals) should provide robust and enforceable restraint covenants. Once your solicitor is satisfied that all is in order, he or she will exchange contracts. From this point, the parties are under a legal obligation to buy and sell subject to the conditions precedent being satisfied.

LeaseIf your lease is for a retail shop – including pharmacies and optometry premises – it will be governed by the retail leasing legislation that applies to each of the states and territories. There are requirements for lessor and assignor disclosure when the lease is transferred. The purpose of the disclosures is to ensure the buyer is made aware of relevant information relating to the lease before accepting liability under it.

Training periodIf you requested it in the contract, the seller will attend at the business after settlement in order to train you and/or your staff and provide you with important practical information. This is not


page 3 | Commercial insightsmeridianlawyers.com.au

automatic, and you must stipulate this in the contract if you require this.

Stock Generally, a stock take will take place before completion to determine the exact amount to be paid for stock. The buyer will generally pay an agreed amount to the seller on completion, which will be adjusted once the results of the stock take are known. If you do not wish to buy certain items of stock (e.g. stock within 3 months of its expiry date), then this should be set out in the contract.

Completion Once the conditions precedent are satisfied, and your finance documentation has been signed, the solicitors will make arrangements to complete the transaction. Completion is sometimes also referred to as settlement.The buyer’s solicitor will liaise with the funder regarding draw down on loans, and with the seller’s solicitor regarding the directions for payment of the purchase monies. All parties will agree a time and date for the settlement meeting. Generally, the seller and the buyer are not required to attend the settlement meeting but will be represented by their solicitors. Your bank funding the purchase will also attend.

At settlement, the solicitors will collect any discharges of outgoing securities, deal with the transfer of the lease, hand over cheques for purchase monies, collect documentation facilitating the transfer of the business name to the buyer and the assignment of any trades marks, and the legal transfer of the business will take place.

After completionYour solicitor needs to undertake a few steps after completion, such as registering the transfer of a lease, checking that outgoing securities have been removed from the PPSR, and ensuring that any adjustment sums payable to you or the seller under the contract are properly dealt with.

In the next edition of Commercial insights we will examine key stages in the purchase process in more detail.

TO DISCUSS BUYING OR SELLING A BUSINESS, PLEASE CONTACT:

MARK FITZGERALD T: 03 9810 6767

JULIAN GREGORY T: 02 9018 9923

GEORGINA ODELL T: 02 9018 9975



EMPLOYMENT LAW

Transfer of a business: what happens to the employees? One important matter that is often overlooked on the sale of a business is the position of the employees.

The employees’ employment with the seller will be terminated on completion and the seller will be required to make necessary payments, such as notice, accrued annual leave, long service leave and redundancy payments, to the employees. That is, unless the terms of sale include that the purchaser will employ the employees.

The purchaser is not otherwise under any legal obligation to offer employment to any employees of the seller. If it does, and those employees commence employment within 3 months of the transfer of business taking place, those employees are “transferring employees”.

The purchaser must recognise prior service of a transferring employee for the purposes of:

a. Long service leave (the transfer time period may be less than three months in some states)

b. Sick leave

c. Notice of termination

d. Unpaid parental leave and the right to request flexible work arrangements.

However, if it is provided to the employee in writing before the transfer, the purchaser may decide not to recognise service of any transferring employee for the purposes of:

a. Annual leave

b. Redundancy

c. The minimum employment period (the first 6 months of employment, or 12 months if the employer has less than 15 employees, during which time if an employee is dismissed they cannot make an unfair dismissal claim).

A written employment contract is a simple way to clarify for what purpose service will be recognised and to clearly set out the terms of engagement, such as whether the employment is permanent, part-time or casual and the hours to be worked.

Purchasers should take care not to commit to taking on the employees on the same terms and conditions of employment without enough information to know what they are inheriting. Traps include inheriting generous redundancy or bonus schemes.

By Sharlene Wellard, Principal

T 02 9018 9939 E [email protected]



By Sharlene Wellard, Principal


Documents a purchaser should see to inform a decision about offering employment, and if so on what terms, include:

• contracts of employment • warning letters• leave records • workers compensation records• safety records • industrial instruments• policies (especially redundancy) • incentive schemes and bonuses• superannuation records (including employee choice declarations)

The transfer of business rules are different when the purchaser buys the employing entity or when the purchaser’s business is a related or associated entity. Purchasers and sellers should seek legal advice specific to their circumstances.

Fitness Australia partnership Fitness Australia has appointed Meridian Lawyers to provide a commercial and consumer law advice line for its registered business members. Fitness Australia is the peak national health and fitness industry association representing health and fitness professionals throughout Australia. Meridian’s commercial team is available to provide telephone advice for up to 20 minutes to representatives of registered businesses in areas such as buying and selling businesses, contracts (including alliance agreements, partnership agreements and joint ventures), protection of intellectual property rights, leases, outsourcing agreements and independent contractor agreements, Australian Consumer Law and privacy law. Further information about the advice line can be obtained at Fitness Australia on T: 1300 211 311.

ANNOUNCEMENT



PRIVACY LAW

Keeping it confidential: privacy issues when buying or selling a businessOccasionally, privacy law issues can arise during the process of buying or selling a business, particularly during due diligence.

The kinds of personal information that might be disclosed to a potential purchaser include customer information, information about trading partners and suppliers, and employee information.

Consideration should always be given to:

• whether information being disclosed is subject to pre-existing contractual obligations of confidentiality, and

• whether personal information can or should be protected by way of de-identification, a requirement for documents and copies of them to be returned to the disclosing party, restricting who has access to the personal information, and requiring that the information is only used for the purposes of due diligence until completion of a sale.

The new owner of a business should consider whether the privacy policy adopted by the previous owner (if any) reflects the true reality of how personal information is used or dealt with by the business (or will be used and dealt with in the future), and should take the opportunity to update and replace the policy in accordance with the Australian Privacy Principles.

By Georgina Odell, Senior Associate


FOR MORE INFORMATION ON PRIVACY LAW AND COMPLIANCE, INCLUDING PREPARING PRIVACY POLICIES, OR IF YOU ARE INTERESTED IN RECEIVING TRAINING ON PRIVACY LAWS, PLEASE CONTACT GEORGINA ODELL ON T: 02 9018 9975.

FRANCHISING

Federal Court decision on franchisor’s unconscionable conductOn 29 January 2015, the Federal Court of Australia made a declaration that a Victorian cleaning franchisor had engaged in unconscionable conduct in contravention of the Australian Consumer Law and failed to comply with the Franchising Code of Conduct.

The case centred around the franchisor’s dealings with two first-time franchisees, one of whom was stated to be of a young age, with no business experience and limited ability to understand legal documents. The Federal Court declared the franchisor had:

• engaged in conduct which was misleading or likely to mislead; and

By Douglas Raftesath, Principal


CASE: ACCC v South East Melbourne Cleaning Pty Ltd (in liq.) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA 25



By Georgina Odell, Senior Associate


By Douglas Raftesath, Principal


CASE: ACCC v South East Melbourne Cleaning Pty Ltd (in liq.) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] FCA 25

• made representations that were false or misleading and concerned the profitability, risk or other material aspect of a business activity that the franchisor invited other people to engage or participate in, and required the performance of work or investment of money by other people.

The franchisor’s conduct, which lead the Court to this conclusion, included representing to a prospective franchisee that:

• if he purchased a franchise for a particular cost ($28,150) then it would provide him with work sufficient to generate a particular revenue ($4,000) each month, when in fact, the franchisor did not have reasonable grounds for making this representation; and

• regardless of the work provided by the franchisor, it was obliged to, and would pay him $4,000 each month, when in fact the franchisor was not obliged to do so under its franchise agreement and it did not have reasonable grounds for making this representation.

The Court also found that the franchisor had:

• failed to disclose the matters required to be disclosed by the Franchising Code of Conduct;

• entered into a franchise agreement with a person without first obtaining a signed statement, as required by the Franchising Code of Conduct, that he had either been given advice about the agreement by an independent legal adviser, business adviser or accountant, or had been told that such advice should be sought but had decided not to seek it;

• failed to pay monies owed to a franchisee; and

• told a franchisee that it would demand payment of the ‘loan’ of the balance of the franchise fee if he terminated his franchise when the franchisor was not entitled to that payment.

The Court declared that each of the franchise agreements were void, and significant penalties were imposed on an individual who was found to have aided and abetted the franchisor’s breaches including disqualification from managing corporations for a period of 2 years, a requirement to pay compensation to the two franchisees concerned, and a substantial pecuniary penalty payable to the Commonwealth of Australia.

FOR ADVICE ON BREACHES OF THE FRANCHISING CODE AND ACL OR ANY COMMERCIAL LITIGATION OR DISPUTE RESOLUTION ISSUE, CONTACT DOUGLAS RAFTESATH, COMMERCIAL LITIGATION PRINCIPAL, ON T: 02 9018 9978.

Lessons learned:• Franchisors should make themselves aware of the new requirements of the Franchising Code (as

amended from 1 January 2015) and ensure their practices and procedures are compliant.• Prospective franchisees should seek legal advice in relation to franchise agreements before signing

or paying any money.• Care must be taken to ensure that disclosures and representations to prospective franchisees are

accurate and based on reasonable grounds.• Court proceedings for breaches of the Franchising Code may be accompanied by proceedings for

breaches of the ACL (unconscionable conduct).• Individuals who aid or abet breaches of the ACL by a company may find themselves with personal

liability for pecuniary penalties, orders for compensation and disqualification from managing corporations or being involved in franchise businesses.



Disclaimer: This information is current as of February 2015. These articles do not constitute legal advice and do not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of these articles.

Meridian Lawyers | Melbourne | Sydney | Newcastle | Brisbane www.meridianlawyers.com.au

Find out more about Meridian Lawyers at meridianlawyers.com.au – our team’s contact details are provided on the following page.

WILLS & PROBATE

Why you should make a willFew people enjoy thinking about their own death. Perhaps this is the reason why so many of us either do nothing about making a will, or put it off as long as we can.

Most people know that they should make a will, but do not understand the consequences of not doing so. If you die without making a will, you will be intestate. This means that you have lost your right to control the distribution of your assets after your death. In the event of an intestacy, the law automatically dictates a set formula for the distribution of your estate to certain categories of relatives in certain proportions, and takes no account whatsoever of what you may have wanted.

If you are in a defacto relationship, and you die intestate then your partner will not automatically be treated as a spouse. This inevitably leads to unnecessary complexity, distress, and cost at an already emotional and difficult time.

By making a will, you will be able to control who receives which of your assets when you die and who is to administer your estate. Your beneficiaries will generally be able to access funds and other property more quickly and more easily if a valid will has been left.

Your will is also a good place to make your wishes known regarding guardianship of children.

Most people agree that once they have made their will, they rest easier knowing that they have made provision for loved ones and put their affairs in order should the unthinkable happen.

Remember to update your will if major life events happen such as the death of a spouse, separation, divorce, together with happier events such as marriage, and the birth of children and grandchildren.

By Ian Goddard, Special Counsel


IF YOU WOULD LIKE TO DISCUSS MAKING A WILL OR ESTATE PLANNING, PLEASE CONTACT IAN GODDARD, SPECIAL COUNSEL ON T: 02 9018 9943.

By Ian Goddard, Special Counsel


Commercial, commercial litigation and employment team

Meet our team

COMMERCIAL & BUSINESS LAW Mark Fitzgerald, Principal T +61 3 9810 6767 E [email protected]

COMMERCIAL & BUSINESS LAW Julian Gregory, Consultant T +61 2 9018 9923 E [email protected]

PROPERTY, WILLS & ESTATES Ian Goddard, Special Counsel T +61 2 9018 9943 E [email protected]

COMMERCIAL & BUSINESS LAW Georgina Odell, Senior Associate T +61 2 9018 9975 E [email protected]

LITIGATION & DISPUTE RESOLUTION Douglas Raftesath, Principal T +61 2 9018 9978 E [email protected]

PROPERTY, COMMERCIAL & BUSINESS LAW Laura Dhana, Senior Associate T +61 3 9810 6771 E [email protected]

EMPLOYMENT & INDUSTRIAL RELATIONS Sharlene Wellard, Principal T +61 2 9018 9939 E [email protected]

COMMERCIAL & COMMERCIAL LITIGATION Gabrielle Parra, Solicitor T +61 2 9018 9925 E [email protected]

INTELLECTUAL PROPERTY, COMMERCIAL & BUSINESS LAW Janette Li, Solicitor T +61 3 9810 9770 E [email protected]

EMPLOYMENT Leanne Dearlove, Solicitor T +61 2 9018 9988 E [email protected]

EMPLOYMENT Katrina Mark, Senior Associate T +61 2 9018 9964 E [email protected]

Meridian lawyers Commercial insights

Documents

Transcript of Meridian lawyers Commercial insights