Entrants to Australia's financial system must obtain a licence with the authorisations appropriate for their proposed business. The two most common types of licences administered by the Australian Securities and Investments Commission (ASIC) are Australian Financial Services Licences (AFSL) and Australian Credit Licences (ACL). This Info Sheet aims to provide useful information on the key considerations in an acquisition of a financial services or credit services business.
Meaning of "buying" or "selling" a licence
Licences are not transferrable from one entity to another entity. Licences are attached to the entity, therefore buying or selling a licence (also known as a transaction) involves the sale and purchase of 100% of the shares in the target company that holds the licence (i.e. a change of control). The buyer will need to take all that is included in the target company as at the date of completion, including assets and liabilities, and the licence.
Change of control process in Australia
It is important to note that there is no 'approval' or pre-approval process for a change in control of an AFSL or ACL as there is in other jurisdictions. However, there are notification requirements upon completion of a transaction – read more here. It is possible that upon receiving a notification, ASIC may ask further question about the ability for the purchaser to comply with the ongoing obligations of the AFSL or ACL and then take enforcement action if they are not satisfied.
Motivations for buying a licence
Licence application timeframes
According to ASIC's service charter, ASIC aims to make a decision on 70% of licence applications within 150 days, and 90% within 240 days, of receiving a complete application. Complex applications could take much longer for ASIC to process. These timeframes apply to both new and variation applications. In contrast, the process for buying a licence might be quicker.
Lack of responsible managers
Many new entrants, especially foreign entrants seeking to break into the Australian market, are unable to find suitable responsible managers who can support the authorisations on the licence. Buying a licence may provide a bridging solution (i.e. retaining the existing responsible mangers on the target company) until the purchaser has someone internally who has accumulated sufficient experience and attained qualifications to take on the role of a responsible manager.
Leverage existing business
An established licence is likely to have developed business processes, operational systems, compliance frameworks, existing client books and human resources with specialist industry and technical knowledge. These could be valuable for new entrants to leverage when setting up their business, especially for foreign entrants who are not familiar with the Australian business and regulatory landscape.
Important considerations before deciding to buy a licence
Licence authorisations
New entrants must do their own research (and seek legal advice if necessary) to confirm whether the authorisations on an intended licence are appropriate for the type of business that they intend to operate. Operating without the appropriate authorisations is a serious breach of the law and could attract severe consequences.
For example, a funds management AFSL with derivatives and foreign exchange contracts authorisations does not mean it permits operating a CFD brokerage (apart from the lack of appropriate authorisations, the existing responsible managers may not have the right experience and qualifications to satisfy the competency requirements).
The purchaser's intentions to use the licence
The majority of the new entrants to the industry often prefer a shell company with a dormant licence as they consider the sale transaction to be simple and it minimises the level of due diligence required. However, dormant licensees are at risk of ASIC scrutiny and/or breaches. Read more about the risks of dormant licences and inactivity here and here.
Fit and proper test
Purchasers must not regard buying a licence as a shortcut method to enter the Australian financial industry and to bypass or circumvent ASIC's rigorous application assessment process. If ASIC becomes aware that the licensee does not meet the fit and proper obligation (for example, the purchaser previously had a licence application refused, withdrawn, rejected, cancelled or suspended), ASIC may suspend or cancel the licence.
Important considerations before deciding to sell a licence
Assets included in the sale
Sellers must decide what is to be included in the sale of the company. This could include cash assets, client books, proprietary software, leases for office premises or other property belonging to the company, as well as any existing employees or contractors the company has engaged. Sellers must, prior to completion, take steps to cease arrangements and remove any assets from the company which are not intended to be transferred or sold to the new owners.
Arrangements for responsible managers
Responsible managers are typically expected to stay on post-completion for a transition period (see further details below). Sellers must determine whether existing responsible managers will stay and if they do, what the terms of engagement will be. Refusal of responsible managers to stay for at least a transition period will generally make the sale unfeasible or significantly reduce the value attributed to the licence. Before progressing further with the transaction, it may be helpful for sellers and responsible managers to have initial discussions with purchasers regarding the scope of services and time commitment required, as well as remuneration arrangements (noting that responsible managers are expected to have oversight of the day-to-day operations under the licence).
Status of compliance and regulatory lodgements
Sellers should ensure that all compliance actions applicable to the licence are brought up to date prior to due diligence and completion. These include but are not limited to:
- lodgement of audits (for AFSLs),
- annual compliance certificates (for ACLs) and AUSTRAC Compliance Reports;
- maintenance of professional indemnity insurance;
- renewal of AFCA membership;
- maintenance of company and licensee details as registered with ASIC, AUSTRAC and AFCA;
- payment of levies and invoices; and
- lodgement of IDR reports.
Players in a transaction
The sale/purchase process can be tricky because it involves different stakeholders who all have the ability to influence the outcome of the transaction.
- Vendor(s) and Purchaser(s) – They are the main players in the sale/purchase of any business and are the ultimate decision-makers in the transaction.
- Agent(s) – They provide opportunities for vendors and purchasers to meet. In some transactions, they are the catalysts in closing the deal between the vendor(s) and purchaser(s). Agents are often instrumental in creating a win-win situation for both parties. Remuneration of agents is also an important factor and it is important that all parties understand who is engaging and remunerating any agent which is involved.
- Lawyers – They can assist the vendor(s) and purchaser(s) with a range of work to execute the transaction, such as legal due diligence, drafting of legal documents and post-completion regulatory notifications.
Steps in a transaction
We have summarised the usual steps in the process of buying or selling a licence.
Heads of agreement
Parties get introduced to each other and discuss preliminary terms of the transaction, such as the exclusivity period, indicative purchase price and deposit, and if known, inclusions/exclusions of the sale. These indicative terms are contained in a non-binding Heads of Agreement that is meant to govern how parties act while conducting due diligence and negotiating the final transaction documents.
Due diligence
Vigorous due diligence on a target company is highly recommended for purchasers in order to avoid any unpleasant surprises after the transaction. Debts and liabilities associated with the company remain in the name of the company upon completion. We also recommend conducting reasonable checks into the existing personnel of the target company to alleviate any issues of representatives being involved in conduct that may be detrimental to the target company or the purchaser by association. A good due diligence report will help purchasers to decide whether to proceed with a deal and may also strengthen their bargaining power. Without proper due diligence, the consequences can be disastrous. We recommend engaging both legal, tax and financial specialists to assist with the due diligence process.
For example, a purchaser may find that, after the transaction, the target company they have just acquired has large financial liabilities arising from complaints made to the Australian Financial Complaints Authority (AFCA) that were not disclosed. In this situation, the purchaser could find themselves paying a large sum of money for the settlement of complaints.
Transaction Documents
The primary document for parties to negotiate is the share purchase agreement. Most of the terms in a share purchase agreement require negotiation to secure the best interests of each party involved (see below for further details). It is crucial to have lawyers involved in this process so that the parties' agreement can be accurately reflected in the share purchase agreement without ambiguity to avoid potential future disputes. Other transaction documents that may be negotiated include director service agreements and responsible manager agreements.
Completion
After the share purchase agreement is finalised and fully executed, parties will move to completion, which is the time when the purchaser(s) advance the total consideration to the vendor(s) and parties manage completion notifications to regulators. Parties will need to comply with all terms and conditions in the share purchase agreement.
Key terms when negotiating a share purchase agreement
Purchase Price
- Each type of licence has different market demand and therefore prices vary subject to the licence authorisations. It is best for vendors to consult industry experts prior to putting their business on the market, as the right advice will allow the vendor a better chance to sell the business at a reasonable market price.
- From a purchaser's perspective, many factors are involved
in the determination of price. It is important to do some research
on the market price for the type of licence to be purchased. In
addition, the following questions should be asked to determine if
the price offered by the vendor is reasonable:
- What is the nature of the business?
- What type of financial services does it provide?
- What funds are under the management (if any)?
- What is their cash flow projection like?
- Do they have existing clients?
- Whether the AFSL is a 'shell' licence?
- Additional factors will also need to be considered depending on the types of authorisations under the AFSL/ACL.
Tax
Tax issues are usually a significant concern for vendors. Vendors should seek advice from tax and finance professionals on how to structure a transaction prior to the execution of the share purchase agreement. Any potential tax liabilities and risks arising out of a particular structure should be taken into consideration in when determining a purchase price to offer.
Note: Sophie Grace Legal does not assist with financial due diligence on the target company.
Restraints
- Restraint of trade provisions are often requested by purchasers. The purpose of these provisions is to protect the purchaser's future business from any potential competition from the vendors. The extent of restraints, location and duration of restraints are usually considered, and these could affect the price that the vendors are willing to accept. Purchasers need to ensure a restraint of trade provision provides them with sufficient protection.
- Vendors need to ensure such provisions do not impede any of their future plans upon completion of the sale.
Warranties and indemnities
- The existence of warranties and indemnities in a share purchase agreement is usually in favour of purchasers. Astute purchasers will try to negotiate the inclusion of as many warranties and indemnities as possible, while vendors will try to negotiate out of these indemnities and warranties. To achieve a win-win situation, vendors often put limitations on warranties and indemnities to render them less favourable to purchasers for their own protection, while still allowing purchasers to enjoy a certain extent of warranties and indemnities.
- From a vendor's perspective, they need to examine each of
the warranties and indemnities and consider the following
questions:
- To what extent can they all be complied with?
- Are all of them reasonable?
- Are they specific enough or too broad?
- It would be wise for vendors to scrutinise their company's past history and records and then decide whether they can commit to the requested warranties and indemnities.
- On the other hand, purchasers should determine the extent of warranties and indemnities to request based on the due diligence results. Unreasonable requests without justification will inevitably result in frustration for both parties.
Responsible Managers
Responsible Managers form the pivotal part of a licence, especially when a particular responsible manager is identified as a key person under the licence conditions. In a situation where there is a sale of a licence, existing responsible managers might either leave on completion of the sale transaction or continue to stay on. This will depend on the negotiations between all stakeholders involved. Responsible managers who intend to stay on must be comfortable with the purchaser, their proposed intended business, the scope of work required and the remuneration arrangements.
If an existing responsible manager decides to resign on completion of the sale transaction, the purchaser will need to appoint one or more responsible managers to replace them. The new responsible manager(s) must have qualifications and experience that will either solely or collectively show organisational competence in all of the authorisations under the licence. If the purchaser cannot find a new responsible manager who shows organisational competence, the purchaser is likely to lose the licence altogether as they will not be compliant with the requirement that a licensee maintain organisational competence. Therefore, to ensure a smooth transition, we suggest the existing responsible manager(s) remain on the licence for at least 12 to 36 months.
Others
Other terms, such as a change of directors, transaction structure (one- or two-stage transactions) and the payment methods will need to be negotiated as well.
Conclusion
There are various ways to structure a transaction to achieve your goals. If you would like assistance with selling or buying an AFSL/ACL, please contact us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
