Clayton Utz Insights

19 July 2012

What if you were selling your privately-owned business and you had a serious OH&S incident?

By Nick Miller and Dan Trindade.

Key Points:

An OH&S incident not only hurts employees, but can derail the sale of a privately-owned business and destroy years of effort.

Generally speaking, privately-owned businesses under-invest in occupational health and safety. What if you were embarked upon a once-in-a-lifetime sale of your privately-owned business and something went horribly wrong on the OH&S front? How would this impact on your sale process and your endeavour to maximise the value from your many years of hard work building up and investing in your business? And more importantly, how can you prevent employee fatality or very serious injury in the first place, and the resulting problems for your employees, their families, and your business?

The pressures on privately-owned businesses when it comes to OH&S compliance…

Many privately-owned businesses take a reactive approach to OH&S compliance, only complying after an OH&S incident puts them in the spotlight.

Added to this pre-existing tendency is the effect of the sale process. Owners will be looking to present the business' financials in the best light, and so may reduce capital and operating expenditure for a period of time ahead of the start of the sale process. This could lead to some OH&S corners being cut.

… and how this affects the sale price

Privately-owned businesses will usually face a credibility issue when undertaking a sale. Trade and private equity buyers expect lesser compliance, poorer systems, and accordingly increased risks.

From an OH&S perspective, this means that these buyers will factor in to the sale price their estimate of the costs required to bring OH&S compliance up to their (higher) standard. A private equity buyer is less able to undertake its own fix, so it will probably build in a higher discount.

It is critical for private business owners to realise the different expectations in areas like compliance that trade and equity buyers bring to a sale process, so they can avoid the discount usually applied to privately-owned businesses.

What are the risks of non-compliance with OH&S laws?

The first thing to remember is that a business' status as privately-owned, "small" or "medium" is not a defence to OH&S prosecution and liability.

The potential for OH&S to have a significant impact on your private-owned business (and you personally) has increased in recent years. For example, in Victoria changes to the Occupational Health and Safety Act 2004 (Vic) have increased penalties and heightened the risk of conviction for directors. These risks will be further elevated when Victoria adopts the harmonised national OH&S laws that have already been adopted in most States and Territories.

A workplace death in Victoria could result in a fine of up to $1,267,560, conviction of the employer company under OH&S legislation and, potentially, conviction of the employer company's directors (which could lead to a significant penalty or even imprisonment). As well, any serious OH&S incident is likely to significantly increase future Workcover premiums.

What happens when there's an OH&S incident?

The first thing to happen will be that the relevant workcover authority (in Victoria, WorkSafe) will issue a "prohibition notice", directing that production in the affected area be stopped.

Then, the workcover authority will investigate the incident and, likely, issue an "improvement notice", requiring remedial work to be done, equipment to be replaced, or other steps to be taken in order to make the plant safe.

Any prosecution arising from the investigation would be likely to start within 12 months of the incident occurring, but could take between 18 months and 3-4 years to resolve. If the incident is a serious one (eg. involving a fatality or serious injury) it is almost certain that a prosecution will occur, usually of both the employer company and the also senior management or directors who were responsible for the work being performed that led to the incident.

These immediate consequences (and the prospect of further in the medium to longer term) will create significant uncertainty for any sale.

How does an OH&S incident affect the sale of a privately-owned business?

A sale process is likely to run for anywhere between three and nine months (with current market conditions generally lengthening this period).

Let's assume a business has attracted some interest and indicative (and very attractive) offers have been made. Due diligence has concluded and one or more parties has begun to negotiate the sale agreement, ahead of submitting a final offer. At this stage, buyers are likely to think that they will be able to fix OH&S compliance up to their standards. So these buyers will make an allowance for transition costs in their pricing, but won't factor in the costs of any serious incident.

Then, the OH&S fatality or serious injury occurs.

As noted, the plant (or part) is likely to be stopped under a prohibition notice and an improvement notice issued shortly thereafter. The seller will bear the cost of complying with the improvement notice.

Perhaps the only improvement required will be construction of an appropriate guard, or the updating of work instructions or supervision processes. But what if more is needed? This could lead to a more extended period of shut down, before the expense of acquiring a new machine (for example) is incurred to fix the problem. Obviously, staff morale in the business will be seriously affected, and there may be union involvement.

Overall, the fact that the business is now subject to a regulatory process will create uncertainty and all planned sale process timelines will likely be pushed out. The business' reputation may be damaged and there may also be a contractual (and revenue) impacts, especially if the business has government contracts (even if the business is one step removed from direct supply to government).

Given these dynamics and issues, it is unlikely a sale will proceed without:

  • a significant discount to the purchase price; and/or
  • the buyer requiring the seller to provide security for a potentially adverse outcome (for example, a fine) and the costs of litigation. This security may be provided by means of a significant retention from the purchase price, so that the seller does not receive this in full until the OH&S matter has been fully resolved, possibly some years down the track.

The buyer and the seller have opposing interests: the buyer is keen to settle any litigation and move on – usually agreeing to plead guilty to some or all of the charges and proposing a suggested penalty to the Court. However the seller will likely want to defend litigation and minimise any penalties and the prospect of any convictions for the (then) directors or management.

Overall, the business will be under heightened regulatory scrutiny. It will likely face an increase in its capital expenditure outlook, beyond what a buyer would have foreseen before the incident occurred.

This suggests that the sale of the business is likely to be at serious risk with, at a minimum, a significant reduction in price and a likely hold back of significant portion of the price for some period.

How could this be avoided?

OH&S compliance should be part of the general preparation undertaken for a sale. Value is best maximised with good preparation, which can often take 2-3 years.

So, as part of the general preparation, an OH&S audit should be undertaken by a suitably qualified OH&S consultant. It will be important to follow through (and document follow through) on the recommendations emerging from any audit. Ideally, a further audit should be undertaken 12 months down the track, to test compliance at that time, following implementation of the original recommendations. Hopefully, the further audit will be clear.

If your OH&S auditor is engaged by your lawyers for the purpose of your lawyers giving you legal advice, then any report the auditor prepares will be privileged and you won't have to produce it in an investigation, prosecution or litigation. If it only identifies issues that can be and are fixed, and a subsequent audit confirms this, then you can waive this privilege if you want to show the proactive steps taken to comply with OH&S obligations.

It is critical that a business being prepared for sale has a proper OH&S compliance plan, which means having appropriate systems and processes to identify and manage risks, including employee induction, visitor training, job safety analysis, supervision and monitoring, incident reporting and monitoring and consultation. This will also reduce the likelihood of an incident occurring and of being prosecuted for less serious OH&S breaches. If a prosecution does occur, it will help you with mitigating penalties and the risk of conviction of directors or managers.

Conclusion

Taking these steps will assist private business owners to protect and maximise value when they look to sell. Even if a sale does not proceed, the investment in compliance is not wasted, as there are still adverse consequences for a continuing business if a serious workplace incident occurs. Either way, employees' safety will be protected.

Good OH&S preparation will enable the business to present as materially more attractive than other privately‑owned businesses, reducing the discount typically applied to such businesses. A well prepared seller will also be able to better defend the value of the business.

Once again, preparation equals value.


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For more information, contact...
Email: Dan Trindade, Partner
Tel: +61 3 9286 6144
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Nick Miller
Nick Miller