Private M&A Guide in Australia – Common deal structures

What Are The Key Private M&A Deal Structures?

Private M&A transactions in Australia are typically structured as either a share sale or an asset sale where the assets of a business are purchased and certain liabilities assumed. While both structures can achieve the same commercial outcome, they differ significantly in terms of risk allocation, tax consequences and transaction complexity.

A share acquisition may be structured as either a direct share acquisition, involving the purchase of shares in an Australian company, or an indirect share acquisition, where the buyer acquires shares in a foreign entity that owns the Australian target company. Different legal consequences may arise depending on which structure is used.

Share Sale: Simpler Structure, Broader Risk

A share sale is often the simpler transaction structure. Rather than transferring individual business assets, the buyer acquires ownership of the target company itself by purchasing its shares.

The transfer process is generally straightforward. The legal title to shares in an Australian private company is typically transferred by executing a share transfer form and recording the transfer in the company’s register of members.

At completion, the seller provides the original share certificates (or an appropriate indemnity if they have been lost or destroyed), and new certificates are issued to the buyer.

The key feature in a share sale is that the buyer acquires the company with all of its assets and liabilities. This includes not only known liabilities, but also contingent or undisclosed liabilities such as tax liabilities, regulatory breaches, customer claims and employee claims. These risks can have direct impact on the value of the shares being acquired and are therefore a major focus of due diligence and warranty protection.

Asset Sale: Greater Flexibility, Greater Complexity

In an asset sale, the buyer acquires specified assets of the business and assumes only those liabilities expressly agreed between the parties.

This structure gives sellers greater flexibility. The seller may wish to choose which assets to divest and which liabilities to retain. The seller may also retain the corporate entity itself, including any existing tax losses which generally would not be possible under a share sale.

The trade-off is that asset sales are usually more complex and time-consuming. Each asset and assumed liability must be separately transferred or assigned in accordance with the legal contractual or regulatory requirements applicable to that asset or liability.

For some assets, transfer may be relatively straightforward. For others, additional steps are required. Real property, for example, requires separate transfer documentation and registration under the relevant State or Territory legislation. Contracts, licenses and intellectual property rights may also require assignments, registrations or third-party consents.

Unlike a share sale, any liabilities not specifically assumed by the buyer remain with the seller.

How Are Private Acquisitions Typically Run?

Most private acquisitions in Australia are conducted through direct negotiations between the buyer and seller. Bilaterial negotiations remain the traditional approach to private M&A transactions.

However, competitive auction processes are also common particularly in private equity transactions. In an auction process, multiple bidders are invited to compete for the target business, often creating greater competitive pressure and maximising value for the seller.

Although Australia does not recognize mergers in the same way as other jurisdictions, a similar outcome can be achieved through a scheme arrangement. A scheme requires approval from the target’s shareholders and the Court. While schemes are widely used in public M&A and public-to-private transactions, they are rarely used in typical M&A deals.

Typical Target Companies in Australia

The target in a private share sale is most commonly a proprietary company limited by shares.

Australian private companies may be either limited by shares or unlimited companies with share capital, although unlimited companies are relatively uncommon. In a company limited by shares, the shareholder liability is generally limited to the amount of their investment in the company. By contrast, members of an unlimited company may be personally liable for the company’s debts and obligations without limit.

Proprietary companies are also subject to several restrictions. They cannot have more than 50 non-employee shareholders, must have at least one director who ordinarily resides in Australia.

Choosing Between a Share Sale and an Asset Sale           

In practice the choice between a share sale and an asset sale depends on the parties’ commercial objectives, risk allocation, tax considerations and desired transaction structure.

Share sales are generally easier to implement because only shares need to be transferred. Asset sales, however, provide greater flexibility by allowing the parties to determine precisely which assets and liabilities move to the buyer. As a result, the preferred structure will often depend on whether simplicity or risk management is the primary driver of the transaction.

Deborah Edo
Asssociate