Australia has some unique due diligence practices for M&A transactions which are different from the usual practices in China. The strength of certain national and state based laws together with robust government registries concerning corporations, security interests, real property and intellectual property allow an acquiring entity to have greater certainty when carrying out legal due diligence. The major differences in due diligence practice are exhibited in the following:
- Ultimate beneficial ownership of shares
- Registration of security interests on a national register
- Registration of third party interests on real property
- National and industry-based employment standards
Legal due diligence
Non-beneficially held shares: In China, a shareholder normally beneficially holds the shares and get the direct benefit from the shares (including dividend payments). In Australia, however, shares held by a person as trustee, nominee or on account of another person are non-beneficially held (i.e. the member holds the share for the benefit of someone else). The ultimate beneficial ownership should be verified during due diligence, particularly for a share acquisition.
National Register of Security Interests: In Australia, the Personal Property Securities Register (PPSR) is a national register which records third-party security interests (such as charges and pledges) in personal property including business assets (such as goods, equipment, motor vehicles, forklifts and receivables). A prospective acquirer can conduct PPSR searches in order to ascertain what, if any, assets that are the subject of the acquisition are subject to third party interests. The completion of the acquisition will customarily be conditional on the delivery of documents to release security interests given by the target company over any of its assets.
Registered third party interest in real property: In Australia, a third party interest over real property is recorded at the Land Registry Office in each jurisdiction in a number of forms including mortgage, caveat, restrictive covenant and easement. Depending on the nature and content of the registered interest, some interests will customarily be released prior to the completion of the acquisition as required by the acquirer, while some interests will survive the acquisition.
Employment: Unlike in China, the terms of employment of workers in Australia are primarily regulated by the Fair Work Act 2009 (Cth) and also, for certain classes of workers, by industrial awards or workplace agreements. Under the federal system, there are around 120 industrial awards which specify the minimum terms and conditions of employment for particular industries or occupations. The common law of employment also has an important role.
Liability for statements
The acquirer’s legal advisors will customarily submit a Request for Information (RFI) to the seller to ask for information and documents for due diligence.
The seller is obliged to provide true, complete and accurate information as requested. Otherwise, the seller can be liable for misrepresentations where such representations amount to ‘misleading and deceptive conduct’ or ‘unconscionable conduct’ under the Australian law.
Silence, in some circumstances, can be misleading and deceptive if a certain matter or fact is reasonably expected to be disclosed.
Liability cannot be excluded by agreement between the parties for misleading and deceptive conduct, although recent case law suggests that parties may be able to limit their liability for misleading and deceptive conduct in some circumstances.
The transaction agreement would, however, customarily exclude matters within the acquirer’s actual and constructive knowledge, and such knowledge will qualify the seller’s warranties.
Publicly available information
In addition to the information provided by the seller in response to the RFI, the acquirer’s legal advisors will normally carry out searches for publicly available information in the following aspects:
Australian Securities and Investments Commission search
- share capital and shareholders
- details of directors
- solvency status of the company
Personal Properties Securities Register search
- registered security interest in assets held by the company
Land Registry Office search
- details of the ownership of real property
- mortgages and charges and other attributes of real property
Intellectual Property Australia search
- details of registered intellectual property (eg. patents and trademarks)
- any material litigation the company is involved in
- across multiple Australian tribunals and courts
- across all Australian states and territories
MistryFallahi Lawyers & Business Advisors has extensive experience to assist foreign and domestic acquirers in undertaking due diligence to satisfy their requirements and expectations, as well as to assist Australian sellers in ensuring that they are fully prepared for and cooperative with due diligence.
Joyce Wang is a dual-qualified lawyer admitted in Australia and China. Joyce advises Australian and international clients on mergers and acquisitions, foreign investment, capital raisings and other regulatory and corporate governance matters. Joyce leads the China Desk at MistryFallahi.