M&A due diligence in the time of COVID-19: What are the ‘hangover’ risks in corporate transactions?
M&A activity continues despite COVID-19, and the changing circumstances may be providing opportunities for buyers. However, measures taken to keep businesses alive during this time may leave you with a nasty hangover post-acquisition
To ensure you are not caught by surprise, we recommend three key considerations when undertaking your due diligence process:
Has the target provided untrue or incorrect information to the ATO when enrolling for JopKeeper Payments, incorrectly identified itself as an eligible employer for JobKeeper Payments or failed to submit monthly business declarations as required by the JobKeeper Payment program?
In short, any due diligence process must determine JobKeeper Payment eligibility so that the eligibility position can be defended should any ATO reviews arise.
Also consider the target’s liabilities and obligations for any failure to comply with the JobKeeper scheme, including a failure to pay eligible employees the minimum amount of $1,500 per fortnight or failure to remit superannuation for any hours worked. The issue of leave liability and accruals should also be considered.
Note that a target company will continue to receive JobKeeper Payments if there is a change of control by way of a share sale. A business acquisition may also enable the buyer to claim, however the buyer entity itself will need to satisfy the decline in turnover test (generally a decline in turnover of 30% compared to the previous year), as well as having carried on a business in Australia on 1 March 2020.
Many companies have received Federal and State stimulus/assistance packages as a result of COVID-19 that will impact their tax liabilities, obligations and compliance requirements.
Review all stimulus packages the target company has received or is enrolled to receive. Verify whether stimulus payments were correctly claimed and that any corresponding obligations have been met. If not, the target may have a liability to repay the incorrectly claimed stimulus payments received before your acquisition and it may be difficult to recover these amounts from the vendor (even if you are protected by appropriate warranties and indemnities).
Further, any tax liabilities that the target company has deferred (for example, payroll tax under the payroll tax relief deferral measures in Victoria) should be identified and included in the balance sheet of the target company so that they can be factored into the purchase price.
Determine whether the target has been paying the full rent due under its leases or if deferral or other rent relief or lease modifications have been agreed to or are under negotiation. Any deferred obligations should be identified in the balance sheet of the target so that they can be factored into the purchase price, or paid out by a seller.
You should also determine if the current premises is appropriate for social distancing and new working requirements. What has worked in the past may not be appropriate going forward.
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