The Federal Government has proposed excluding contracts for the sale of business from the upcoming ipso facto reforms. This is a practical exclusion and will have immediate implications on the way in which sellers and purchasers document earnout arrangements and other arrangements ancillary to the sale of business after 1 July 2018.
Upcoming ipso facto reforms
To assist in protecting asset values for the benefit of a distressed or insolvent company, new laws which will come into effect on 1 July 2018 will introduce a stay on the exercise of certain contractual rights (including termination, acceleration and enforcement rights) that arise by reason of:
a counterparty entering into administration;
a scheme of arrangement or compromise;
a receivership over the whole or substantially the whole of its assets; or
its financial position if subject to such insolvency processes.
The stay will only have an impact on contracts, agreements or arrangements entered into after 1 July 2018. The exceptions to the laws are to be contained in regulations and a declaration, drafts of which were released by Treasury for public consultation on 16 April 2018. The consultation process has now concluded.
Contracts, agreements or arrangements for the sale of business to be excluded
The draft regulations and declaration indicate that contracts, agreements or arrangements for the sale of all or part of a business, including by way of the sale of securities or financial products, are intended to be excluded from the application of the stay. This is welcome recognition that the curtailing of the rights of a purchaser under such a contract may impact on the availability of a sale as a business rescue alternative and may also impact the price purchasers are willing to pay in distressed acquisitions.
If this proposed exception becomes law on its current terms, there may be a few immediate implications for parties to future contracts for the sale of business. For example, as earnout provisions are sometimes documented outside of the contract of the sale of business (within a deed), it is not clear whether the proposed exception to the stay will extend to the separate earnout deed. It could be argued that this deed falls within the main “arrangement” for the sale of a business but, ultimately, the position is unclear. To overcome this potential issue and ensure ipso facto rights are preserved, parties may need to consider documenting earnout arrangements within the contract for sale. This approach would apply to other provisions that are sometimes documented outside of the contract for sale, including warranties and indemnities.
We expect that the finalised regulations and declaration will be made available shortly. In the meantime, transaction counterparties and their advisors should be aware of the potential implications of the upcoming reforms on transactions and other documented arrangements from 1 July 2018. If parties are in current negotiations on potential transactions, it may be worthwhile considering the benefits of fast-tracking documentation so that contracts can be signed prior to 1 July 2018.
About the authors
Zina has extensive experience advising major trading and investment banks, syndicates, funds and public companies in relation to various high profile and complex financial turnarounds, restructurings and special situations.
Zina has worked on a large number of distressed and performing portfolio sale transactions in Australia and across Asia acting for both purchasers and sellers. She also specialises in debt trading and alternative finance transactions and has acted for a wide range of funds and alternative capital providers.