Articles: January - June 2010
June 2010 - Asset Sale vs Share Sale
April 2010 - The new Real Estate Agents Act – What does it mean for you?
March 2010 - Redundancy the Right Way
February 2010 - Beware of the Cross Lease
January 2010 - Farm Leases
June 2010 - Asset Sale vs Share Sale
by Julie Olds
Associate
When it comes to selling or purchasing a business there are many options to achieve an outcome that suits both the vendor and the purchaser.
In this article I wish to cover the broad differences between a share sale and an asset sale. From within the scope of a share sale there are many ways and means of bringing in new blood, from an employee share purchase to capital investment from third parties.
An asset sale involves the sale of some or all of the assets of a company and used in the carrying on of the company’s business. The assets may include fixed assets such as machinery, livestock and stock in trade, and intangible assets such as goodwill. Goodwill includes the trading reputation of the company, essentially the company’s customer database and contracts in existence at the time of takeover.
Where all of the assets of the business are sold it is common for the sale to be categorized as a “going concern”. The result is that the transaction will be zero rated for GST purposes provided that –
- Both vendor and purchase are GST registered
- The business is sold as a taxable activity
- The contract states it is to be sold as a going concern
- The assets sold constitute a business that is capable of being carried on as a going concern by the purchaser
If only part of the business is being sold it is important to ensure that the part being sold is capable of being carried on as its own business, otherwise it may not be considered a going concern for GST purposes.
In contrast, a share sale involves the transfer of company shares by the vendor to the purchaser at an agreed price. The purchaser in a share sale takes over an existing company and acquires the assets and liabilities – which includes contingent liabilities, including some which the Company may not be aware of at the time of the transfer, such as unpaid taxes and penalties.
An Asset sale has certain advantages for both parties –
- Flexibility for the purchaser – they need not buy everything
- Lower Risk – steering clear of the contingent liabilities
- Assets are often easier to value
- Reduced worries about the Securities Act implications
- Tax advantages – cost of assets reset to market value on sale and the vendor can use tax losses to eliminate tax liability
On the other hand there are some negatives –
- The purchase price must be apportioned (tangibles and intangibles), which can lead to conflict between the purchaser and the vendor
- Change of Ownership paperwork for all assets
- Assignment of key contracts – some may not be assignable
- Transfer of employees must be dealt with in an appropriate fashion
A Share sale can be straightforward in that there is business continuity and no apportionments need to be completed. The transaction will not incur GST as it is specifically exempt under the GST Act 1985.
There will always be a higher risk for a purchaser in a share sale situation due to contingent liabilities and a valuation of the shares can be complex and expensive.
It is important to make the assessment as to which structure suits the transaction at the outset otherwise matters can get quite messy going forward. There are a few matters above which need to be weighed up and much will be depend on the bargaining position of the parties.
Julie Olds is an associate with Logan Gold Walsh Lawyers Limited. This article is intended as broad information only, for specific legal advice please contact us on 06 370 6480 or enquiries@lgwlawyers.co.nz.
April 2010 - The new Real Estate Agents Act – What does it mean for you?
by Kathryn Williams
The Real Estate Agents Act 2008 (“the Act”) came into force on 17 November 2009. It is designed to update the current legislation (making the industry more independent and transparent) and aims to provide greater protection for those buying and selling real estate, whether it be residential or commercial.
The following are some of the new rules that will be relevant to those both buying and selling in the future:
- The Act requires sellers and agents (now known as licensees) to disclose to a buyer known defects in the land and buildings. This could include such matters as weathertightness, plans by neighbours to undertake works which may affect a buyer’s privacy or view, and work already undertaken without the necessary consents. It is important to note that sellers and licensees are not required to discover underlying or hidden defects in the land or buildings, only to disclose defects which are known to exist.
- Licensees who have knowledge and experience in the real estate industry must, where it appears likely that the land and buildings may be subject to underlying or hidden defects, speak with the seller to see if the defects in fact exist, and advise the buyer of any significant potential risk so the buyer can seek expert advice if he or she chooses to do so.
- Licensees must explain agency agreements to the seller, as well as how commissions are paid and how the land will be marketed. Licensees must make sure that the seller is aware that he or she is entitled to seek legal or technical advice before signing an agency agreement.
- Licensees must not mislead buyers or potential buyers, nor provide false information. Silence by the licensee and non-disclosure of information can be regarded as misleading conduct.
- Licensees are not able to withhold information that, by law or fairness, should be provided.
- Licensees must deal fairly with all parties involved in a transaction. The licensees’ duty of care no longer lies only with the seller.
- The Act requires that licensees provide a copy of the Approved Guide to people when they are entering into an agency agreement or an Agreement for Sale and Purchase.
As you will see, some of these new rules turn the principle of caveat emptor (or “buyer beware”) upside down. Therefore, if you are buying or selling and would like to know more about your rights and obligations before you sign an agency agreement or Agreement for Sale and Purchase, please feel free to contact any member of the team at Logan Gold Walsh Lawyers Limited for advice.
March 2010 - Redundancy the Right Way
by Tim Grooby
Staff Solicitor
As the hardship of the recession eases some employers may think they need not consider redundancy. However, redundancies may be an employer’s only option to sustain profitability. It is important that an employer knows the correct procedure to follow when making a redundancy to ensure a cost saving measure does not become an expensive operation.
In considering an employee for redundancy an employer must apply the following processes:
Alternative Options
Where an employer finds that their business is not profitable, turning to redundancy can sometimes seem like the only viable option. Although it is up to an employer to decide what is best for their business they should consider alternatives before deciding redundancy is the only appropriate option. Redeployment, transferring employees to other work sites, retraining, early retirement, and voluntary redundancy are options that should be considered.
Consultation
Employers have a duty to consult employees who may be affected by a proposed redundancy. Employees must be given sufficient time and information to give their view on a possible redundancy. An employer must not make any decision on redundancy until after consultation, where an affected employee must be given an opportunity to state their view. An employer can have a plan in mind for their business; however they must consider the views of employees with an open mind.
Selection Criteria
When selecting an employee for redundancy it is important an employer only uses relevant selection criteria. The selection criteria must be disclosed to employees within a reasonable amount of time so it can be considered and commented on at consultation meetings. Selection criteria may include performance and lacking the necessary skills and competencies. The “last on, first off” policy is often used when making a redundancy. If this policy is not specifically written into the relevant employment agreement it can not be relied on by itself, and must be coupled with other relevant selection criteria.
Notice
Where an Employment Agreement stipulates a notice period on redundancy it is imperative that an employer adhere to that period. If there is no notice period written into the agreement a “reasonable notice” period may be implied. Generally, one month’s notice of termination will satisfy this rule. However, in some circumstances, such as an employee in a management position and who has given a long period of service to the business, a longer notice period of 4 months may be required.
Compensation
Employers often ask if they are required to pay compensation when they make an employee redundant. Where there is no provision for compensation specifically written into an employment agreement an employer is not required to pay compensation to an employee when they make them redundant.
AS this area of law is fraught with potential personal grievances, it is important that an employer adheres to the procedure outlined in this article, and seek specific legal advice. Please contact Logan Gold Walsh Lawyers Limited if you would like assistance on any employment matters.
February 2010 - Beware of the Cross Lease
by Julie Olds
Associate
In the 1950s lawyers came up with the concept of the cross lease to get their clients out of minimum lot size requirements and hefty contributions requested from their local authorities for subdivisions. At that time a lease was not considered a subdivision – this has since been changed by the Resource Management Act 1991, but there are still many cross lease titles out there.
What do you own?
As an owner of a cross lease title you own a proportionate share of the underlying freehold title, and a leasehold interest in your particular flat or unit (usually for a term of 999 years). For example if your flat is part of a block of six , you would own a 1/6 share of the freehold title plus the lease of your own flat or unit and the exclusive area surrounding it. The titles are called composite titles as both interests stand together on the one composite title.
Could problems arise?
Usually there are restrictive covenants on the titles which designate areas for the exclusive use of individual units (eg. courtyards, gardens or parking spaces). You must comply with these covenants as set out in your lease. If you fail to comply, the other flat owners may be able to compel you to sell your undivided share in the freehold title.
There are usually no issues with the cross lease title until someone wants to change the external dimensions of their flat. If you or your neighbour add a deck, carport or conservatory you may need to alter the flats plan to reflect the new “footprint” of your flat. This can be a costly process as the area will need to be surveyed and referred to in a new or varied lease.
Sometimes problems can arise when repairs are required to common areas. Unlike the Unit Titles Act (in apartment blocks and the like) where the rights and responsibilities of the Body Corporate are clearly set out, there is no legal redress unless there is specific provision in the lease to deal with the issue.
Will you be able to get a mortgage?
There is usually no problem in using a cross lease title as security for a loan.
Summary
Many people treat cross lease titles as they would any freehold title. The difficulties come into play where some alterations are made without a necessary change to the title plan. Sometimes this doesn’t become apparent until a prospective purchaser looks at the plan on the title to the property and compares it to what is actually there on the ground. This can cause a further headache when dealing with all of the other stresses associated with moving home.
If you have any questions about cross leases, give the writer or one of our team a call at Logan Gold Walsh.
January 2010 - Farm Lease
by Brett Gould
Principal
Leasing of farm land is a useful option open to farmers when they want to retain their farm land whilst securing an income stream with little input. For a tenant, the benefit is the enabling of farm business expansion and flexibility, but without the capital or debt cost associated with purchasing land. In some cases it can provide a viable alternative to sharemilking. There are a number of particular areas unique to rural farming – particularly dairying. These include:
Fonterra shares and options
1. Fonterra has particular capital requirements. This means that any landowner has several options if leasing a dairy farm. These include:
a. The lessee purchasing Fonterra shares.
The lessee purchases shares, it must purchase at least the minimum required based on production. The parties have to agree who purchases any additional shares from increased production. The lessee would have all the voting rights based on shareholding for the term and would receive any payment or allocations made to shareholders calculated on shareholding. In the absence of any terms to the contrary the lessee would pay for any additional shares and would receive any payments for shares resumed. At the expiry of the lease the lessee could either:
i. transfer or sell the shares back to the owner; or
ii. transfer the shares to another farm subject to Fonterra rules; or
iii. notify Fonterra that he has ceased supply from the farm and request Fonterra to resume his shares.
It should be noted at this stage that there are special rules relative to the new capital structure and the transition period to be taken account.
b. The lessee holds the shares on trust
In this case, a declaration of trust is incorporated into the lease. As the lessee would hold the shares in their name, they would satisfy Fonterra’s requirements. At the determination of the lease the supply would transfer back to the landowners and there would have to be a transfer of the shares. The declaration of trust would cover matters such as:
- the payment for additional shares due to production increases
- the proceeds resumed from the shares due to production decreases
- the entitlement to any bonus shares
- the entitlement to any dividends/cash payments paid on shareholding
- the forwarding of notices received referring to shareholder meetings and voting instructions in relation to those meetings.
Any such declaration would need to be flexible to extend into any different equity arrangements implemented by Fonterra.
c. No transfer of supply and shareholding
The lease may provide that the lessee is to receive all the milk proceeds paid by Fonterra similar to a sharemilking arrangement. Variables, such as the lessee purchasing the shares, will arise.
d. The landowners transfer the supply but not the shares
In this situation Fonterra will require the shares to be resumed. The lessee would need to purchase the required shares from Fonterra prior to supply or to enter into a contract to supply subject to the prevailing policy.
It is appropriate to point out at this time that dairy company capital requirements are complex as is evidenced in the present capital restructure and legal advice should to be taken.
