Warranties, Representations
& Indemnities
Of Buying a Business
    Presenter: Steve Brown
    B.Ec, LL.B (Syd), M.App.Fin ...
Topics

 Issues to Consider
 Pre-contractual representations
 Specific Contractual Terms & Conditions
 Negotiation of ...
Formalities and terms

Terms of a
contract
  express
  implied
  conditions
  warranties


               www.etiennelaw.c...
Taking Instructions
 Find out what it is that the client wants. It
  is trite just to say a vendor wants a sale
  and a p...
Taking Instructions
 Checklists are a useful tool to obtaining
  proper instructions
 Checklists minimise a lawyers expo...
Issues to Consider - Vendors
   Should the vendor obtain a guarantee for
    performance of a corporate
    purchaser(Swe...
Issues to consider - Purchaser
1.   Does the purchaser have the finance
2.   Does the purchaser have the capacity to
     ...
   the simplicity of the vehicle and its cost of
    establishment;
   the nature and size of the business;
   the pote...
Negotiation Issues – Pre-
contractual representations
   Negotiating What to Look Out For…Statutory
    Impact on Contrac...
Misleading or Deceptive
Conduct
 Strict
       liability           Silence
 Actual deception         Ambiguity
 Overa...
Misleading conduct - s 52 Example
     Four principles were established in the case of Taco Co
     of Australia v Taco Be...
Misleading conduct - s 52
  A SECOND PRINCIPLE:
It's the overall impression on the target
   audience that counts
       ...
The Difference Between
Agreements and Contracts?
Agreements are not as a
 general rule:
    Legally enforceable
Courts wil...
The Difference Between
Agreements and Contracts?
Contracts are ALWAYS:
    Legally enforceable
Courts will enforce as the
...
Non Enforceable Agreement
                          If you wash my car
                          I’ll give you $10




   ...
Non Enforceable Agreement
                   I’ll pick you up for
                   dinner at 8 o’clock




           ww...
Contracts & Agreements – what
are they?
Practical Answer – they are both
Risk Minimization tools that operate
 as
  Check...
Contracts & Agreements – How
Are They Risk Tools
 Agreement to meet and discuss a
form of long term supply
arrangement
 ...
Contracts & Agreement - As
Checklists or Rule Books
     Who is to do what – who is to sell; Who is
      purchase (whate...
Why have a Contract instead of
an Agreement
Risk




                                                        Formality &
 ...
Contracts as risk tools are used to minimise
the inherent risks of the contract

Risks with a contract to        Risks wit...
How courts interpret contracts
 Courts use rules of construction as
  pointers to discover the presumed
  intention of th...
Rules of Contract Construction
   The object of construing a contract is to ascertain what the mutual
    intentions of t...
Rules of Contract Construction
    Business common sense is sometimes used in addition to the words
     chosen by the pa...
Rules of Contract Construction
   The words of a contract should be construed in their grammatical
    and ordinary sense...
Rules of Contract Construction
Implied terms                                Special situations
 Courts may imply terms
  ...
Drafting the Contract
 Use standard form or not eg Law Society
  or own
 The need to ensure that what the parties
  are ...
Specific Contractual Terms &
Conditions

 Goodwill
 Lease issues
 Employees
 Reduced Deposit Clauses
 Exclusion Claus...
Goodwill
   is incorporeal personal property The
    Commissioners of Inland Revenue v Muller &
    C’s Margarine Ltd (19...
Goodwill examples
   A company which operates a business
    distributing high value medical equipment
    in Australia h...
Goodwill examples
   The vendor is selling a well known convenience
    store which is located in a particularly busy are...
Goodwill
   If there is a risk of customers         The other ways of protecting
    walking after the vendor           ...
Goodwill example
   An electrical contractor servicing domestic
    customers has had considerable success from
    adver...
Lease of Premises
 New lease or assignment
 If a real property lease is being assigned
  remember to advise vendors that...
Employee Issues
   Both vendor and purchaser need to be aware of
    employee issues.
   Four types of employees
     K...
Terms & Conditions –
Reduced Deposit Clauses
Iannello & Anor v
  Sharpe [2007]
  NSWCA 61
 5% paid on exchange           ...
Reduced Deposit Clauses

 To minimise penalty issue never reduce
  deposit
 But how to negotiate this with purchaser
   ...
Exclusion Clauses & S 52
   You cannot contract out of s 52.
    In entering into this agreement the
    purchaser acknow...
Tenders & S 52
   Representations that a project will take
    a stated period of time and it does not
    or the start i...
Tenders & s 52
 A RFT that does not indicate that strict
  compliance with the terms of the tender is
  essential gives t...
Early access
 To premises
 To executed documents that can facilitate
  completion
 To staff, key personnel or
  clients...
Early Access
 Do not permit early access
 Do not have documents held in escrow
 Rather than early access provide
  supe...
Overview
 What  is due diligence?
 What is the purpose behind due
  diligence?
 Who Conducts due diligence?
 What is t...
Contracts as risk                                            Acquisitions

minimisation tools?
Risk
                     5...
LEGAL RISK MANAGEMENT
    1.   Understand the legal aspects.
    2.   Identify potential risks.
    3.   Take practical st...
Reduce the likelihood of an
event
   Due Diligence




                    www.etiennelaw.com
Reduce the consequences of an
event
 Warranties
 Liquidated Damages
 Restraints of Trade
 Post employment of key perso...
Transfer in full or in part the
consequences of an event
Firm       A price which is not variable for any reason
Price
Fix...
Avoid the event
   Don’t proceed with the purchase or sale




                    www.etiennelaw.com
Questions?




             www.etiennelaw.com
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Contracts Warranties Indemnities Representations

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Contracts Warranties Indemnities Representations

  1. 1. Warranties, Representations & Indemnities Of Buying a Business Presenter: Steve Brown B.Ec, LL.B (Syd), M.App.Fin (Mac), A.Bus, FAICD www.etiennelaw.com
  2. 2. Topics  Issues to Consider  Pre-contractual representations  Specific Contractual Terms & Conditions  Negotiation of Contract warranties etc www.etiennelaw.com
  3. 3. Formalities and terms Terms of a contract express implied conditions warranties www.etiennelaw.com
  4. 4. Taking Instructions  Find out what it is that the client wants. It is trite just to say a vendor wants a sale and a purchaser to purchase a business  Lawyers role is to facilitate the successful achievement of our clients goals in other words to ensure performance but of what!  Of what is the aim of taking instructions. www.etiennelaw.com
  5. 5. Taking Instructions  Checklists are a useful tool to obtaining proper instructions  Checklists minimise a lawyers exposure to professional negligence claims  Only every act for one party  Work with clients accountant regarding tax structure issues on sales and purchases www.etiennelaw.com
  6. 6. Issues to Consider - Vendors  Should the vendor obtain a guarantee for performance of a corporate purchaser(Swept-Up Marketing Pty Ltd v Voltrant No. 282 Ltd (NSW) Supreme Court, 26 April 1989, ) Indemnity www.etiennelaw.com
  7. 7. Issues to consider - Purchaser 1. Does the purchaser have the finance 2. Does the purchaser have the capacity to run the business 3. Determine the legal structure for the purchaser by considering: www.etiennelaw.com
  8. 8.  the simplicity of the vehicle and its cost of establishment;  the nature and size of the business;  the potential for the growth of the business and the need for additional capital for growth;  the taxation consequences of each vehicle;  the manner in which the business is to be managed and the degree of owner involvement;  the cost and complexity of terminating the vehicle on the owner exiting the business or passing it on to their family;  the structure of the purchaser’s family; and  the potential for the business to fail and the implications if it does fail. www.etiennelaw.com
  9. 9. Negotiation Issues – Pre- contractual representations  Negotiating What to Look Out For…Statutory Impact on Contract Law  Misleading or deceptive conduct  Trade practices act (Cth) ss 52 & 53  Fair trading act (NSW) s. 42  Unconscionable conduct  Trade practices act (Cth) pt IVA  Fair trading act s. 43  Contracts Review Act (NSW only) www.etiennelaw.com
  10. 10. Misleading or Deceptive Conduct  Strict liability  Silence  Actual deception  Ambiguity  Overall  Erroneous impression assumption  Product puff  Half truths www.etiennelaw.com
  11. 11. Misleading conduct - s 52 Example Four principles were established in the case of Taco Co of Australia v Taco Bell Pty Ltd (1982) ATPR 40-303 as assisting to determine whether conduct is misleading or deceptive. 1. The relevant section of the public must be identified. 2. All people within that section must be considered including the intelligent and not so intelligent, the educated and uneducated. 3. Evidence that someone was misled is helpful, but is neither conclusive nor essential. 5. When a misconception has arisen it is important to determine why, in order to see if it was the business' conduct that caused it. www.etiennelaw.com
  12. 12. Misleading conduct - s 52  A SECOND PRINCIPLE: It's the overall impression on the target audience that counts  silence can be misleading - if there is a duty to speak  a prediction can be misleading - if there's no reasonable ground to make it www.etiennelaw.com
  13. 13. The Difference Between Agreements and Contracts? Agreements are not as a general rule: Legally enforceable Courts will not involve themselves. www.etiennelaw.com
  14. 14. The Difference Between Agreements and Contracts? Contracts are ALWAYS: Legally enforceable Courts will enforce as the law dictates www.etiennelaw.com
  15. 15. Non Enforceable Agreement If you wash my car I’ll give you $10 www.etiennelaw.com
  16. 16. Non Enforceable Agreement I’ll pick you up for dinner at 8 o’clock www.etiennelaw.com
  17. 17. Contracts & Agreements – what are they? Practical Answer – they are both Risk Minimization tools that operate as Checklists or Rule Books by applying Performance standards www.etiennelaw.com
  18. 18. Contracts & Agreements – How Are They Risk Tools  Agreement to meet and discuss a form of long term supply arrangement  Contract to supply an apple  Contract or agreement to sell a toll manufacturing business www.etiennelaw.com
  19. 19. Contracts & Agreement - As Checklists or Rule Books  Who is to do what – who is to sell; Who is purchase (whatever it is that is being sold).  When are the servicesgoods to be supplied by vendor– when are they to be paid for by purchaser.  How are the servicesgoods to be supplied.  Consequences of good or poor performance. www.etiennelaw.com
  20. 20. Why have a Contract instead of an Agreement Risk Formality & Legality least formal to most formal form form of Agreement oral contract of written contract www.etiennelaw.com
  21. 21. Contracts as risk tools are used to minimise the inherent risks of the contract Risks with a contract to Risks with a sale of supply an APPLE business contract HIGH RISK LOW RISK www.etiennelaw.com
  22. 22. How courts interpret contracts  Courts use rules of construction as pointers to discover the presumed intention of the parties to a contract.  The rules are not slavishly applied.  The rules are used to produce as reasonable and just result as possible. www.etiennelaw.com
  23. 23. Rules of Contract Construction  The object of construing a contract is to ascertain what the mutual intentions of the parties were as to who is to do what, how and when from the words they used to express the obligations each assumed by entering into the contract.  The intention of the parties is the meaning of the words they have used. There is at common law no intention independent of that meaning.  The intention of the parties must be ascertained from the words used, in light of the surrounding circumstances and the object of the contract, in so far as the object has been agreed or proved.  Courts construe the objective intention of the parties not the parties actual intention. www.etiennelaw.com
  24. 24. Rules of Contract Construction  Business common sense is sometimes used in addition to the words chosen by the parties. Here the courts look at the purpose of the contract, whether the form of the contract was a standard form or negotiated by the parties, and the commercial experience of the judge who is to construe the meaning of the words used.  Where the words used are clear, the court must give effect to them even if they have no discernible commercial purpose.  Although not overtly recognised, courts sometime manipulate the construction of a contract to achieve a fair result on the facts as ascertained by the court.  In construing a contract clauses must not be considered in isolation, but must be considered in the context of the whole of the contract. www.etiennelaw.com
  25. 25. Rules of Contract Construction  The words of a contract should be construed in their grammatical and ordinary sense, except to the extent that some modification is necessary to avoid absurdity, inconsistency or repugnancy.  The ordinary meaning of a word is its meaning in its plain, ordinary and popular sense, although that sense may be a sense among a particular group of persons.  Where a contract contains technical terms the court may discover the meaning of those terms using a dictionary, or where the technical terms are in dispute the court may only proceed upon calling expert evidence as to what the terms mean. www.etiennelaw.com
  26. 26. Rules of Contract Construction Implied terms Special situations  Courts may imply terms where a contract is silent  Standard form contracts upon a point but only if all of Any special conditions are the next 5 conditions are able given greater weight to the to be satisfied: standard conditions in the  it is reasonable ; case of conflict  it is necessary to give business efficacy to the contract;  it is so obvious a term it goes without saying;  it is able to be expressed clearly;  it is not contrary to an express term. www.etiennelaw.com
  27. 27. Drafting the Contract  Use standard form or not eg Law Society or own  The need to ensure that what the parties are seeking to achieve will be achieved the contract being a checklist to achieve this  Performance is the key www.etiennelaw.com
  28. 28. Specific Contractual Terms & Conditions  Goodwill  Lease issues  Employees  Reduced Deposit Clauses  Exclusion Clauses  Early Access www.etiennelaw.com
  29. 29. Goodwill  is incorporeal personal property The Commissioners of Inland Revenue v Muller & C’s Margarine Ltd (1901) AC 217  has no value independent of the business to which it attaches In Commissioner of Taxation v Murray (1998) 72 ALJR 1065,  Therefore is its crucial to identify the bundle of assets and source of goodwill to capture it for a purchaser: www.etiennelaw.com
  30. 30. Goodwill examples  A company which operates a business distributing high value medical equipment in Australia has developed important commercial and personal relationships with the German manufacturer of the equipment. The purchaser will need to ensure that it takes an assignment of the exclusive distribution agreements and to work on the relationship with the German manufacturer. It would be prudent for the purchaser to meet the management of the supplier in Germany and perhaps to retain the vendor as a consultant for a period of time to massage the transfer. www.etiennelaw.com
  31. 31. Goodwill examples  The vendor is selling a well known convenience store which is located in a particularly busy area, with lots of passing traffic and good parking. The residual term of the lease is relatively short. The purchaser will have to ensure that it renegotiates the lease term to ensure that its rights to the premises are secured. www.etiennelaw.com
  32. 32. Goodwill  If there is a risk of customers  The other ways of protecting walking after the vendor from a loss of goodwill is to leaves, it may be necessary to require the vendor to grant a maintain a retention fund from restraint of trade. the sale proceeds from which  Besides penalties for loss money can be repaid to you as purchasers negotiation earnout purchaser if customers are lost provisions which increase the through no fault of the payment for the sale to a purchaser. vendor upon successfully  Retention funds are often maintaining profitability coupled with clawback provisions of various levels of sophistication. www.etiennelaw.com
  33. 33. Goodwill example  An electrical contractor servicing domestic customers has had considerable success from advertisements placed in the Yellow Pages over a number of years. The company also has easy to remember telephone numbers. The company name contains the name of the vendor that the vendor wishes to retain. www.etiennelaw.com
  34. 34. Lease of Premises  New lease or assignment  If a real property lease is being assigned remember to advise vendors that he assignment does not extinguish their liability under the lease: Only a new lease will do this  Is term of existing lease sufficient to secure value of business for purchaser. www.etiennelaw.com
  35. 35. Employee Issues  Both vendor and purchaser need to be aware of employee issues.  Four types of employees  Key employees who must be retained if goodwill is to be secured  Those offered employment  Those not offered employment  Those offered employment but decline to be employed www.etiennelaw.com
  36. 36. Terms & Conditions – Reduced Deposit Clauses Iannello & Anor v Sharpe [2007] NSWCA 61  5% paid on exchange 14. Reduced Deposit Notwithstanding anything else herein  No Completion contained, the Vendor shall accept, on exchange of this Agreement, payment  Need to consider if of $225,000.00 being part of the deposit. The parties expressly agree balance of unpaid that if the Purchaser defaults in the observance or performance of any money penalty obligation hereunder which is or has become essential the balance of the  In this case held to be deposit, namely $225,000.00, shall become immediately due and payable a penalty and the Purchaser shall forfeit the whole of the sum of $450,000.00 pursuant to Clause 9 hereof to the Vendor.” www.etiennelaw.com
  37. 37. Reduced Deposit Clauses  To minimise penalty issue never reduce deposit  But how to negotiate this with purchaser  Be firm  Be innovative take balance by promissory note or bill of exchange or bank guarantee www.etiennelaw.com
  38. 38. Exclusion Clauses & S 52  You cannot contract out of s 52. In entering into this agreement the purchaser acknowledges that it has not relied on any statement, representation or warranty by or on behalf of the vendor whether express or implied as to ...  Clarke equipment Australia ltd v Covcat Pty ltd felling machine, exclusion clause in contract no effect.  Collins Marrickville Pty Ltd v Henjo investments Pty ltd. www.etiennelaw.com
  39. 39. Tenders & S 52  Representations that a project will take a stated period of time and it does not or the start is delayed beyond the time it is represented to commence may amount to misleading and deceptive conduct.  Section 51A shifts onus of proof for predictions. A representations as to future action must be made upon reasonable grounds. www.etiennelaw.com
  40. 40. Tenders & s 52  A RFT that does not indicate that strict compliance with the terms of the tender is essential gives to a tenderer not shortlisted a right to injunct the tender process (MacMillan’s case)  A tender that is not evaluated in accordance with how tenders were represented to be evaluated may be misleading (Hughes Aircraft v Airservices Australia) www.etiennelaw.com
  41. 41. Early access  To premises  To executed documents that can facilitate completion  To staff, key personnel or clients/customers www.etiennelaw.com
  42. 42. Early Access  Do not permit early access  Do not have documents held in escrow  Rather than early access provide supervised training  Rather than early access allow due diligence www.etiennelaw.com
  43. 43. Overview  What is due diligence?  What is the purpose behind due diligence?  Who Conducts due diligence?  What is the due diligence process?  Where is information obtained?  Lessons from the cases. www.etiennelaw.com
  44. 44. Contracts as risk Acquisitions minimisation tools? Risk 5 year HDPE Supply contract More Formality & Legality Less risk as level of risk increases least formal to most formal form form of Agreement oral contract of written contract www.etiennelaw.com
  45. 45. LEGAL RISK MANAGEMENT 1. Understand the legal aspects. 2. Identify potential risks. 3. Take practical steps to eliminate/minimise those risks.  By taking actions that:  Reduce the likelihood of an event;  Reduce the consequences of an event;  Transfer in full or in part the consequences of an event (Negotiate a price to accept the risk); and/or  Avoid the event. www.etiennelaw.com
  46. 46. Reduce the likelihood of an event  Due Diligence www.etiennelaw.com
  47. 47. Reduce the consequences of an event  Warranties  Liquidated Damages  Restraints of Trade  Post employment of key personnel  Exclusion clauses www.etiennelaw.com
  48. 48. Transfer in full or in part the consequences of an event Firm A price which is not variable for any reason Price Fixed A price, the final value of which is fixed by Price reference to some variable parameter such as inflation, currency exchange rate, or maintainable profits of the businesses Earnout/ A price based on the post acquisition profits of Workout the business so that the seller shares in the on Price going growth of the businesses www.etiennelaw.com
  49. 49. Avoid the event  Don’t proceed with the purchase or sale www.etiennelaw.com
  50. 50. Questions? www.etiennelaw.com

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