Bringing in an equity investor into your agribusiness – issues that arise
Many in the agri sector are currently considering the possibility of bringing in an investor into their business for a variety of reasons. The farmer, horticulturist, or another agribusiness may need further capital to sure up the balance sheet as the banks become more conservative, or capital to fund a key piece of expansion, or releasing capital for a family member not involved in the family business.
So how does this typically happen and what are the legal issues to consider?
Due diligence and having your house in order
The investor will typically engage their financial advisors and lawyers to undertake due diligence in respect of the investment in your farm, orchard or vineyard, etc. It is important that your house is in order with a complete set of accounts over a number of years and that all key assets and consents to operate the business are in place. For example, any uncertainty in relation to a key consent, whether it be land use or a water take will have a significant impact on value. It is important to run the ruler over your own business before seeking an investor to make sure you putting your best foot forward and are in a good position in terms of investment. Often you will have a sum in mind as to how much you will need to strengthen your balance sheet or invest in expansion. This will translate into a number of shares or percentage of ownership relative to the fair value of the business. The fair value will often be determined by reference to risk. Reducing that risk is key.
Another due diligence issue to consider is what entity is the investor investing in? Does that entity own the land and business, or just the business which is in turn leased from another entity? It is important to have clarity around your structure and what you are oﬀering, before seeking investors.
Governance and control
A key issue will be the level of control and representation that the new investor will require. Are you going to be 50/50 partners? Will the investor be passive or active? Will they require representation on the board? These will be important issues to work through to ensure that the investor’s expectations in terms of their involvement meet your expectations.
If it is the case that the investor is going to be a minority shareholder and take a relatively passive role with perhaps the right to appoint one director to the board, then the matter is relatively straight forward, but this is not always the case. The biggest risk from the investor’s point of view is financial, whereas the biggest risk for the party seeking an investor is often relationship orientated. If the relationship goes wrong this will have a serious impact on the business and stress levels. To minimise the risk of diﬀering expectations it is important to document the transaction properly from the beginning.
A Heads of Agreement (HOA) is a good start, setting out key aspects of the agreement between the parties in terms of the amount to be invested, number and class of shares, right to appoint a director(s) to the board and what key decisions of the company will require shareholder support.
A draft HOA a good way of drawing out key issues and ensuring that the parties are on the same page at the beginning. The HOA can attach an initial business and Capex plan with some detail around each party’s role in the organisation. The agreement can be conditional upon completion and execution of more detailed documents, such as a shareholder agreement and subscription agreement in respect of the issue of the shares to the investor with appropriate warranties.
Financial Markets Conduct Act 2013
In addition to the documentation around the investment, it will be important to ensure compliance with the Financial Markets Conduct Act 2013 (FMCA). Any oﬀer of shares is technically caught by the FMCA as a “regulated oﬀer” requiring disclosure. It will be important to ensure that the investor or investors fall within an appropriate exclusion within the Act to avoid the cost and complexities of having to issue a product disclosure statement (PDS).
In summary, it is important to make sure your house is in order before seeking investors. There needs to be clarity about what they are investing in, so as not to “muddy the waters”. This may involve some restructuring before investment takes place. The investment should be properly documented, and an HOA is a good start to ensure that both parties are on the same page. A key risk is the relationship risk and while proper documentation of the deal cannot extinguish this risk, it can mitigate and reduce the possibility of a fall out between the parties.
Lastly, ensure proper legal and accountancy advice as a number of issues may arise including compliance with the FMCA and tax issues to name a few .
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