Buying or Selling a Business + Capital Raisings


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Buying or Selling a Business + Capital Raisings

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Buying or Selling a Business + Capital Raisings

  1. 1. The scalable andsaleable program Legals<br />
  2. 2. CREATING VALUE<br /><ul><li>Wolf of Wall Street – Jordan Belfort
  3. 3. How does an entrepreneur create value and sell that as an asset on exiting the business?
  4. 4. Most entrepreneurs don’t like running the business but love starting, building them and once up </li></ul> and running and selling them<br /><ul><li>Visionary – aim to build business in a way that makes it saleable
  5. 5. Scalable & Saleable - create value by finding the buyer/ investor who will pay the highest price </li></li></ul><li>What we will be covering today<br />
  6. 6.
  7. 7. Start-Ups<br />Categorised in 4 ways depending on founder’s goal<br />a. Scalable Business:<br /><ul><li>At outset set up to be capable of handling growth when opportunity or demand arises/ created
  8. 8. Scale up business to enable rapid growth
  9. 9. To enable rapid growth need access to external funds – investments by venture capitalists
  10. 10. Correct structure in place to ensure adequate accountability, management control and limit liabilities
  11. 11. Companies employ professional management, legal and financial advisors
  12. 12. Implement formal board structures and ensure contractual relationships with 3rd parties are watertight and limit company’s liability
  13. 13. Know and understand contractual and legal responsibilities</li></li></ul><li>Start-Ups <br />b. Saleable Business:<br /><ul><li>Est. with view to selling the business in the short term to a strategic buyer for a premium price
  14. 14. Attractive to buyer and able to operate without founder
  15. 15. Strategic buyers looking to grow by acquisition
  16. 16. Implement strategies to build value in the business and reduce risk
  17. 17. Est with structure to achieve return on investment</li></li></ul><li>Start-Ups <br />c. Small Business Entrepreneur: <br /><ul><li>Majority of small business owners
  18. 18. Owner’s vision is simply to improve current financial and lifestyle position and hopefully fund a reasonable retirement
  19. 19. Business strategy focused on developing steady growth and provides owner with wage + small profit
  20. 20. Little thought to how they will exit the business
  21. 21. Not spent time sufficiently preparing business for exit
  22. 22. No Succession Plan</li></li></ul><li>Start-Ups <br />d. Buying yourself a job: <br /><ul><li>Business provides same return as can earn in job + expense of overheads
  23. 23. Reliant on skills and knowledge of owner
  24. 24. Owner finds customers, services & takes care of management
  25. 25. Working in the business and not on it
  26. 26. Profits small enough to support owner
  27. 27. No solid wealth creation strategy
  28. 28. Can’t operate without owner
  29. 29. No succession plan
  30. 30. Exit likely a handover to person with similar skills not a sale </li></li></ul><li>2. Creating Value: De-risk <br /><ul><li>Process of de-risking - removing risk factors from business - limits areas of exposure to uncertainty
  31. 31. Attracting outside investors / buyers – ‘getting investor ready’
  32. 32. Value from point of view of buyer/ investor
  33. 33. Reducing areas of exposure to uncertainty and risk
  34. 34. Increases chances of success and provides clarity in critical areas of the business
  35. 35. Exposure to liabilities – prevent ‘skeletons in closet’
  36. 36. Investors – may have reasonable tolerance for risk</li></ul> but not welcome unnecessary risk<br /><ul><li>Pitching prematurely without de-risking</li></li></ul><li>De-risking your business<br /><ul><li>De-risking business to maximise exit price or attract investment
  37. 37. Structural changes may build value for business – increase transparency + confidence
  38. 38. Premium to acquire de-risked business
  39. 39. Process of 2 de-risking falls into 2 main areas:
  40. 40. Clarification
  41. 41. Change in substance</li></li></ul><li>
  42. 42. Reduce potential risk and liability<br />
  43. 43. 3. ShareSale or Asset Sale<br />
  44. 44. 14<br />Share sale or asset sale<br /><ul><li>Share sale – subject matter is the share capital of company that conducts the business
  45. 45. Asset sale – subject matter is the specified assets acquired and liabilities assumed by purchaser
  46. 46. Share sale –
  47. 47. Verify members, number and type of securities making up entire share capital
  48. 48. Identify options or convertible securities
  49. 49. Identify restriction i.e. pre-emptive rights or change in control right in constitution or shareholders deed
  50. 50. Purchaser indirectly acquire all assets and liabilities
  51. 51. Asset sale –
  52. 52. Description of assets necessary to conduct business
  53. 53. Detailed schedules of fixed assets, IP and other assets
  54. 54. Broad general wording for assets owned and used by vendor in business
  55. 55. Excluded assets</li></li></ul><li>Asset Sale Major Characteristics<br /><ul><li>Only assets specified in sale agreement
  56. 56. Liabilities remain with vendor
  57. 57. Contracts (supply agreements, customer contracts, property</li></ul> leases and finance agreements) of which Purchaser wishes to <br /> have benefit to be assigned or novated<br /><ul><li>Licences to be transferred – consent requirements
  58. 58. Employment agreements- redundancy/new contracts/ same</li></ul> terms<br /><ul><li>Accrued benefits – long term & sick leave benefits - deduction of purchase price</li></li></ul><li>Share Sale Major Characteristics<br /><ul><li> Acquires all shares issued in target company
  59. 59. Indirectly acquires all assets and liabilities
  60. 60. All contracts remain with company – change in control clauses
  61. 61. Licences for operation of business
  62. 62. Company is employer of employees – continue </li></li></ul><li>Overview: advantages / Disadvantages<br />
  63. 63.
  64. 64.
  65. 65.
  66. 66.
  67. 67. 4. Transaction Documents<br />a. Confidentiality Deeds<br /><ul><li>Purchaser undertakes due diligence prior to formal documentation
  68. 68. Sufficient information to evaluate business
  69. 69. Vendor – concerned about level of information to be disclosed to purchaser, sensitive commercial data, trade secrets other confidential information
  70. 70. Purchaser + advisers to enter into CA
  71. 71. Return and/or destroy</li></li></ul><li>4. Transaction Documents<br /><ul><li>Confidentiality Deeds (cont.)</li></ul>Some issues to consider:<br /><ul><li>(Unilateral/Mutual):
  72. 72. Obligations mutual or one way
  73. 73. Purchaser (recipient) agreed to be bound by obligations of confidentiality in favour of Vendor (discloser)
  74. 74. Scrip consideration – reciprocal confidentiality undertakings
  75. 75. (Scope):
  76. 76. Vendor will want the scope of information to be specified broadly
  77. 77. Purchaser will seek defined specific scope
  78. 78. (Exceptions): Discloser to ensure that exceptions to confidentiality are sensible and appropriately defined i.e.
  79. 79. Information in public domain
  80. 80. Required by law i.e. listed company may require response to market rumour ASX LR 3.1B</li></li></ul><li>4. Transaction Documents<br /><ul><li>Confidentiality Deeds (cont.)
  81. 81. (Recipients): Determine to whom recipient may disclose the confidential information i.e. Advisers - limit and define.
  82. 82. (Auction Sale):
  83. 83. Number of bidders – potential purchaser
  84. 84. Each bidder enter into CA
  85. 85. Ultimate purchaser require assignment of each of bidder’s CA at completion to enable it to enforce obligations of confidentiality
  86. 86. (Exclusivity Undertakings): No Shop/ No Talk
  87. 87. No shop – Vendor agrees not to solicit offers from 3rd party during agreed period
  88. 88. No talk – Vendor agrees not to negotiate with any other bidders – whether approach solicited or not - subject to fiduciary carve-out
  89. 89. Fiduciary carve out - directors may respond positively to a better offer if form view that in ‘best interests’ of company/ shareholders ‘
  90. 90. Standstill – not acquire securities in target for agreed period</li></li></ul><li>4. Transaction Documents<br /><ul><li>(Insider Trading):
  91. 91. Listed Company mindful of offence of ‘tipping’ – communication of price sensitive information to persons likely to trade in the securities
  92. 92. If disclosing insider information, vendor include a standstill period during which recipients undertake not to deal in the securities during standstill period</li></li></ul><li>4. Transaction Documents<br />b. Heads of Agreement/ Letters of Intent/ Term Sheets - Informal preliminary documents<br /><ul><li> Purpose:
  93. 93. Record agreed legal + commercial terms
  94. 94. Preparation and negotiation of acquisition documents
  95. 95. Structure for negotiation of formal acquisition documents
  96. 96. Assist in drafting contracts
  97. 97. Continue negotiations in good faith
  98. 98. Key Provisions:
  99. 99. Purpose
  100. 100. Confidentiality (regard to existing CAs)
  101. 101. Negotiation of contracts
  102. 102. Exclusivity
  103. 103. Responsibility for costs
  104. 104. Break fees (1% of enterprise value)
  105. 105. Time table - road map for transaction
  106. 106. Access/ due diligence rights
  107. 107. Major commercial terms</li></li></ul><li>4. Transaction Documents<br /><ul><li>Enforceability
  108. 108. When drafting an agreement consider whether or not agreement (in whole or in part) is legally enforceable
  109. 109. General Principle - Courts will not enforce an agreement to agree - Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982)149 CLR 600
  110. 110. Case law to assess when parties in negotiation reach agreement and agree that a formal contract will follow:</li></li></ul><li>
  111. 111. 4. Transaction Documents<br /><ul><li>Subject to Contract
  112. 112. ‘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
  113. 113. Must explicitly state that informal agreement or parts of it are legally binding
  114. 114. 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:
  115. 115. Formal nature of the document – words such as ‘agreement’
  116. 116. Certain of the provisions being immediately enforceable
  117. 117. Identify 3rd party empowered to settle uncertainties or disputes</li></li></ul><li>4. Transaction Documents<br />Kirby P also listed features as indicative that a HoA was merely an ‘agreement to agree’ and not legally enforceable:<br /><ul><li>Vague undertaking – ‘proceed in good faith and consult together’
  118. 118. Formulation of more comprehensive agreement yet to be negotiated
  119. 119. Contemplated that ‘fresh or additional’ terms to be agreed upon i.e. terms in HoA open to negotiation not intended to be binding
  120. 120. ‘Proposal’ – commitment for future not presently legally binding
  121. 121. Absence of dispute resolution clause
  122. 122. Nature of document</li></li></ul><li>4. Transaction Documents<br /><ul><li>Non–contractual remedies
  123. 123. When Informal Agreement not directly enforceable - estoppel and restitution may allow Court to grant relief
  124. 124. loose or incomplete agreement acted/ relied upon</li></ul>i. Estoppel:<br /><ul><li>Incurred a detriment
  125. 125. Acting on reasonable reliance that valid contract is or is about to be formed/ fact
  126. 126. Justice requires enforcement of the promise</li></ul>Invoke estoppel to prevent other party reneging – held to representation<br />
  127. 127. 4. Transaction Documents<br />ii. Restitution: <br /><ul><li>Party who has conferred a benefit on another in anticipation of valid contract which does not materialise
  128. 128. May claim in restitution for the return of its benefit or its value
  129. 129. Summary:
  130. 130. Clear of intention - document or particular provisions legally binding
  131. 131. If intention that no binding agreement until formal documents settled, then provisions relating to:
  132. 132. confidentiality
  133. 133. exclusivity
  134. 134. break fees
  135. 135. due diligence rights and
  136. 136. costs</li></ul>Make intentions clear – Obligations to be legally enforceable<br />
  137. 137. C.Core Sale Documents<br />Share Sale –core docs<br /><ul><li>SSA
  138. 138. PoA – appointing buyer pending registration of shares
  139. 139. Share Transfer Form
  140. 140. Share Certificate
  141. 141. Consents to act as director, secretary, member, registered office & public officer
  142. 142. Resignations - directors
  143. 143. ASIC Form 484 – change of company details</li></ul>Asset Sale –core docs<br /><ul><li>ASA
  144. 144. Deeds of release (charge over asset)
  145. 145. Novation Deed
  146. 146. Assignment Deed
  147. 147. Escrow Deed – escrow of Purchase money</li></li></ul><li>6. Parties to Agreement <br />a. Acting for Purchaser:<br /><ul><li>Ensure all vendors are bounds to agreement
  148. 148. Have regard to structure of vendor/s i.e. individuals, trusts, funds or PE vendors
  149. 149. Different types profiles/ corporate structures
  150. 150. Indemnities, warranties and post completion liability structure
  151. 151. Existence during warranty period
  152. 152. Vendors to be jointly & severally liable under sale agreement – determine early on
  153. 153. Vendors’ credit worthiness if breach of warranty</li></li></ul><li>6. Parties to Agreement <br /><ul><li>Funds to meet claim for breach of warranty post-completion
  154. 154. Purchaser look to Warrantor/s – entity/person standing behind the warranties
  155. 155. Alternative means where parties lack creditworthiness – pay portion of purchase price into escrow
  156. 156. Payment deferred and paid following expiry of certain time periods or secured by Bank Guarantee </li></ul>b. Acting for Vendors:<br /><ul><li>(Newco):
  157. 157. Purchaser form newco to purchase assets/ shares
  158. 158. No comfort that can satisfy claims – substance
  159. 159. (Lack of credit support):
  160. 160. PE vehicles/ funds typically do not provide deposits or any credit support at signing
  161. 161. Subject to finance</li></li></ul><li>6. Parties to Agreement <br /><ul><li>Typically vendors would not accept ‘subject to finance’ condition
  162. 162. Market practice for sales to PE buyers for vendors to accept credit risk
  163. 163. Comfort – reputation in market
  164. 164. Not PE deals – parents or related entities guarantee purchasers obligations to pay purchase price</li></li></ul><li>7. Liability<br />Joint Liability: <br /><ul><li>legal responsibility attracted by 2+ individuals for loss to 3rd party
  165. 165. Recover whole amount of loss from each party in same amount</li></ul>Several Liability:<br /><ul><li>Legal responsibility capable of being severed
  166. 166. Each party individually responsible for their contribution to loss</li></ul>Joint & Several Liability: <br /><ul><li>No matter how many wrongdoers the court identifies, successful party can call upon one to meet full amount of claim</li></ul>Common Law joint liability is implied –override with express contractual term<br />
  167. 167. 7. Liability<br /><ul><li>Purchaser will want vendors to be jointly & severally liable so that it can sue any single vendor
  168. 168. Recover whole loss leaving vendor to seek contribution from other vendors
  169. 169. Vendors can sign a deed of contribution amongst themselves regarding cross liability – vendors may agree to cap liability to respective proportion of purchase price
  170. 170. Vendors counter-argument – not take risk on the solvency of other vendors not related to it
  171. 171. Often agreed position: joint & several liability with vendor’s liability capped at respective proportion of purchase price</li></li></ul><li>8. Forms of Consideration<br />a. Cash:<br /><ul><li>Currency
  172. 172. Permitted method of payment:
  173. 173. Electronic transfer in Real Time Gross Settlement – RTGS
  174. 174. Payment by Bank cheque
  175. 175. Escrow arrangement
  176. 176. ‘Cleared funds’ before completion
  177. 177. Cash or RTGS </li></ul>b. Shares/ Scrip:<br /><ul><li> Part or all of purchase price may be satisfied by scrip – issue of shares in purchaser or related body corporate of purchaser
  178. 178. Completion obligations incl. issuing or procuring the issue of shares to vendor
  179. 179. Vendor usually conduct due diligence on purchaser & require warranties </li></li></ul><li>8. Forms of Consideration<br />c. Deferred Purchase Price/ Retention Amounts: <br /><ul><li> Portion of purchase price may only become payable on a date after completion
  180. 180. 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
  181. 181. Purchaser becomes contingent creditor of the vendor – risk of insolvency or non-payment (credit risk)
  182. 182. Address issue by payment of deferred component of PP to escrow agent to hold until parties entitlements established
  183. 183. Purchaser entitled to set off against deferred PP the amount of any warranty claim
  184. 184. Vendor will want to prescribe when warranty claim has been sufficiently established to permit deduction</li></li></ul><li>8. Forms of Consideration<br /><ul><li>Vendor will want to narrow circumstances:
  185. 185. Agreed liability for breach of warranty or other liability under sale agreement
  186. 186. Judgment by Court confirming liability</li></li></ul><li>8. Forms of Consideration<br />d. Earn-Out Provisions: <br /><ul><li> 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
  187. 187. Sale agreement set out how to measure performance of business:
  188. 188. Revenue
  189. 189. Earnings i.e. net profit before tax, EBIT or EBITDA
  190. 190. Sale agreement specify process for determining financial performance, agreed accounting principles and dispute resolution</li></li></ul><li>9. Warranties<br />a. What is a warranty?<br /><ul><li>Express/ implied promise that certain facts are as represented
  191. 191. Sale agreement - express terms represent entire agreement
  192. 192. Implied warranties or representations are excluded
  193. 193. Purchaser receives little protection under law – caveat emptor ‘buyer beware’
  194. 194. Purchaser takes on risk
  195. 195. Minimise/ allocate risk –assurances from vendor in form of warranties& representations as to assets and business & in share sale, undisclosed liabilities</li></li></ul><li>9. Warranties<br />b. Scope of warranty<br /><ul><li>Depends on whether asset sale or share sale
  196. 196. Both types of agreements incl. warranties in relation to identity of vendors and ability to enter into transaction
  197. 197. Most negotiated sections of sale agreement
  198. 198. Vendors wish to limit warranties to which feel comfortable giving from own knowledge
  199. 199. Purchaser broad warranties
  200. 200. Scope of warranties may be limited based on how comprehensive DD investigations have been
  201. 201. However, DD investigations usually based on material provided by vendors
  202. 202. Even where purchaser conducts DD, still justifiable to for purchaser to seek warranty protection</li></li></ul><li>9. Warranties<br /><ul><li>SSA contain more extensive warranties than under ASA
  203. 203. In asset sale, warranties sought usually those that effect value to which parties attribute to the assets
  204. 204. Examples:
  205. 205. The assets
  206. 206. Ownership of assets
  207. 207. Licences – to be transferred
  208. 208. IP – ownership/ transfer
  209. 209. Contracts
  210. 210. In share sale – scope more extensive & detailed
  211. 211. Purchaser seek warranties in relation to assets of business, shares, capacity of vendors & liabilities of company
  212. 212. Examples:
  213. 213. Financial and other commitments of company
  214. 214. Share capital of company
  215. 215. Trading arrangements, indemnities, guarantees, licences, consents</li></li></ul><li>9. Warranties<br /><ul><li>Employees – employee benefits
  216. 216. Litigation
  217. 217. Insurances
  218. 218. Taxation – purchaser insist on indemnity in relation to tax liabilities
  219. 219. Person/ entity who gives warranties – Warrantor
  220. 220. Seek warranties from persons who have economic interest in sale or sufficient substance to minimise credit risk over warranty period
  221. 221. Ability to compensate for any damages in event of breach of warranty
  222. 222. Nature of vendors i.e. individual, company, trust or partnership to determine who provides warranties
  223. 223. Concerns about creditworthiness of warrantor – Hold back portion of PP in escrow or deferred PP</li></li></ul><li>9. Warranties<br /><ul><li>Amount of claim for breach of warranty deducted from amount held in escrow or deducted from amount of deferred PP
  224. 224. Escrow amount released or deferred payment paid on expiry of warranty period – takes into account any claims notified but not settled at completion</li></ul>c. Date of application of warranties<br /><ul><li>Time interval between executing sale document and completion
  225. 225. CP to be satisfied before completion
  226. 226. During interval period, vendor continues to operate the business
  227. 227. Sale agreement – restrictions on way business to be operated
  228. 228. Purchaser require warranties to apply at date of execution of contract and at completion
  229. 229. During interval period, warrantors promptly disclose in writing circumstance that may result in warranty claim</li></li></ul><li>9. Warranties<br />d. Purchaser’s Remedies for Breach<br /><ul><li>A breach of warranty entitles purchaser to claim damages for loss subject to rules relating to remoteness of damage & duty to mitigate loss
  230. 230. Place claimant in position it would have been in had warranties been true
  231. 231. Calculated by deducting from market value that business would have had if the warranty had been true, the actual market value of the business
  232. 232. Market value of the business, if warranties had been true, will generally be the price paid for the business or shares
  233. 233. Hurdles, baskets & caps</li></li></ul><li>9. Warranties<br /><ul><li>Key Difference Between Warranty & Indemnity
  234. 234. Purchaser prohibited from claiming damages for breach of warranty for loss preventable by reasonable mitigating action
  235. 235. 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
  236. 236. Indemnity – a promise to reimburse indemnified person should a particular liability arise – warranty on indemnity basis
  237. 237. Purchaser push for wide all encompassing definition
  238. 238. Vendor seek to confine concept
  239. 239. Purchaser require indemnity to cover total amount of loss + costs + interest + penalties i.e. purchaser insist on tax indemnity
  240. 240. 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</li></li></ul><li>9. Warranties<br /><ul><li>Qualification of Warranty
  241. 241. Warranties customarily qualified by anything disclosed in disclosure letter, sale agreement, DD material and information available for inspection in public records
  242. 242. Sale agreement define meaning of a reference to,’ except as disclosed’
  243. 243. Acting for vendor – anything disclosed in relevant disclosure material
  244. 244. Acting for Purchaser – reference confined to anything fully & fairly disclosed in such a way that quantum & risk is reasonably apparent from the disclosure material
  245. 245. Both parties should keep detailed records of information provided throughout sale process including DDQ, responses, RFI
  246. 246. Vendor ensure information described in sufficient detail
  247. 247. Purchaser ensure that received material information</li></li></ul><li>9. Warranties<br />e. Time Limits<br /><ul><li>Sale document include time limits on warranty claims
  248. 248. Warrantors not liable unless receives notice of claim within specified time
  249. 249. Purchaser seek extended periods for claims regarding tax – usually 4yrs after relevant tax yr
  250. 250. Warranties customarily qualified by anything disclosed in disclosure letter, sale agreement, DD material and information available for inspection in public records</li></li></ul><li>10. Completion<br />Completion – Point at which (and process by which) title to the assets or shares is transferred to purchaser and vendor receives payment<br /><ul><li>Completion deliverables to be delivered on completion by both parties
  251. 251. Fulfilment of all conditions precedent and to occur within agreed no. of days of that happening
  252. 252. Common mistake to under resource the completion process
  253. 253. Completion checklist</li></li></ul><li>10. Fundraising<br />a. General: (Very brief overview of 20/12/2 Rule)<br /><ul><li>Small companies need capital to get started
  254. 254. What are options if don’t have it & banks won’t lend it?
  255. 255. Venture capital, seed capital, investment capital, private equity – money to grow your business in exchange for equity
  256. 256. Companies raise funds by issuing shares and borrowing and issuing debentures
  257. 257. Trusts raise funds by issuing units (capital/income units) and also borrowing
  258. 258. Investors require sufficient information to assess value of securities and make rational investment decisions</li></li></ul><li>10. Fundraising<br /><ul><li>Value of securities determined by the rights they confer – rights to income or capital distributions from a business
  259. 259. Value depends on assessing value of the enterprise
  260. 260. 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
  261. 261. Fundraising and disclosure requirements regulating offer of securities in Australia - Chapter 6D of the Corporations Act (Cth) 2001
  262. 262. Fundraising provisions ensure that investors have access to the information which a reasonable investor would require for the purpose of making an investment decision
  263. 263. ‘Reasonable Investor’ standard – general disclosure standard</li></li></ul><li>10. Fundraising<br /><ul><li>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:
  264. 264. Existing shareholders of company; or
  265. 265. Employees of the company.</li></ul>b. General proposition : Disclosure <br />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)<br />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<br />
  266. 266. 10. Fundraising<br />b. Offers that do not need disclosure: <br /><ul><li>Section 708 CA sets out 15 kinds of offers that do not need disclosure
  267. 267. 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
  268. 268. 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
  269. 269. The offeree in position to make inquiries of the offeror face-to-face and the cost of disclosure document is disproportionately high</li></li></ul><li>10. Fundraising<br /><ul><li>One of the exceptions for disclosure for the issue of securities by a company is ‘Small scale offerings – personal offers’</li></ul>c. Small Scale Offerings: 20/12/ 2 Rule<br /><ul><li>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
  270. 270. ‘Personal offer’ – individual offer made to person known to be interested in the offer </li></li></ul><li>10. Fundraising<br />Difference between a Retail and a Wholesale Investor:<br /><ul><li>Wholesale investor defined as an individual/ investing entity that meets one or more of the following tests:
  271. 271. Net assets of more than A$2.5 million
  272. 272. Has income of more than A$250K over last 2 FY
  273. 273. Is investing A$500K or more into the business
  274. 274. Retail investor is simply everyone else who doesn’t meet above test
  275. 275. No limit on how much and how often you can raise funds from wholesale investors – exempt from 20/12/2 Rule
  276. 276. ASIC requires wholesale investors to deliver a certificate – signed by investor’s accountants</li></li></ul><li>10. Fundraising<br />d. Raising Capital for a Private Company:<br />The Power:<br /><ul><li>The directors hold power to decide to raise equity capital , subject</li></ul>to qualifications:<br /><ul><li>Constitution of company
  277. 277. new shares first offered to existing shareholders
  278. 278. existing shareholders consent
  279. 279. anti-dilution provisions
  280. 280. Shareholders Deed – regulates issue of further securities
  281. 281. Terms of issue of existing securities i.e. preference shares may restrict further issue of shares having equal or better rights
  282. 282. Power always exercised in good faith in best interest of company
  283. 283. Good commercial reasons for decision</li></li></ul><li>10. Fundraising<br /><ul><li>Implementation not unfairly prejudice existing shareholders</li></ul>ii. The Securities:<br /><ul><li>Various forms of securities to choose from
  284. 284. Different rights, rewards and risk profiles for investor + taxation treatment of dividends and capital gains </li></ul>A. Ordinary Share<br /><ul><li>right to vote at general meeting
  285. 285. right to receive annual financial statements
  286. 286. right to participate in dividends if declared on a winding up, a right to the return of the capital paid on the share</li></li></ul><li>10. Fundraising<br />B. Preference Share<br /><ul><li> Limited right to vote at GM</li></ul> a right to participate in dividends (if any) the company pays up to a maximum rate<br /><ul><li>It is ‘preferred’ because the rights to payment of dividend and return of capital have priority over an ordinary share </li></ul>C. Convertible Note <br /><ul><li>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
  287. 287. 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
  288. 288. Noteholder becomes a creditor of the company</li></li></ul><li>10. Fundraising<br />D. Option<br /><ul><li>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</li></ul>iii Liability<br /><ul><li>Although no formal disclosure document
  289. 289. The law still gives remedies to an investor who was subject to misleading or deceptive conduct in the fundraising
  290. 290. 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
  291. 291. Seek legal advice early on in the process</li></li></ul><li>11. Concluding Comments<br />