Mergers and Acquisitions (M&A) -

Mergers & Acquisitions (M&A)

Author: Ita Wong

Businesses are increasingly under pressure due to challenging market conditions. If you are considering merging or acquiring another business, it is prudent to understand the different legal scenarios that may arise.

A merger is the legal consolidation of two business entities into one. Whereas an acquisition is a transaction where one business entity acquires a share or all of another business entity.

If you participate in a merger, it is vital that you focus on retaining the best of the culture of each organisation. Too many mergers fail because the cultural standards fall to the lowest common denominator. It is easy to destroy good culture and hard to build it.

The advantages of M&As include increasing market share, cost advantages obtained due to economies of scale, diversification, access and entering a new market, preventing a competitor from gaining a larger market share. M&As also come with disadvantages such as inheriting outstanding contracts or malicious business reputation from the vendor as a result of ill-informed commercial decisions.

It is important to ensure that you have all the documentation and information regarding the transaction. For instance, a small business vendor is required to provide a Section 52 Statement (Statement) if the business costs less than $450,000. The Statement provides a due diligence guide for a purchaser and sets out the financial performance of the business over the last two years. If the Statement is not provided to the purchaser, the contract can be absolutely void and of no legal effect pursuant to the Estate Agents Act 1980 (Vic).

For acquisitions on a larger scale, although businesses are not legally required to notify the Australian Competition and Consumer Commission (ACCC) of a proposed merger, Section 50 of the Competition and Consumer Act 2010 (Cth) prohibits acquisitions if the acquisition would have the effect (or be likely to have the effect) of substantially lessening competition in any market. In this scenario, it would be judicious for a purchaser to notify the ACCC of a proposed acquisition for review and authorisation.

The ACCC must take into account, inter alia, the following matters when determining whether the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market:

The actual and potential level of import competition in the market.
The height of barriers to entry to the market.
The level of concentration in the market.
The degree of countervailing power in the market.
The likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins.
The extent to which substitutes are available in the market or are likely to be available in the market.
The dynamic characteristics of the market, including growth, innovation and product differentiation.
The likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor.
The nature and extent of vertical integration in the market.

It may also be necessary to consider whether any acquisition requires approval of the Foreign Investment Review Board (FIRB).

We can assist in all stages of the M&A process to ensure compliance with the law and legal requirements from pre-lodgement discussions with the ACCC to lodgement; negotiating terms of the deal; conducting due diligence e.g. intellectual property rights; reviewing or drafting terms and conditions of the contract to mitigate risk to protect your interests; and attending to settlement.

Lewis Holdway Lawyers provides legal advice in relation to mergers or acquisitions. Contact Ita Wong ita.wong@lewisholdway.com.au or John Wardlaw johnw@lewisholdway.com.au if you have any questions about this topic.