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Purchasing property business

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GoSeigen
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Purchasing property business

#65923

Postby GoSeigen » July 9th, 2017, 10:47 pm

I am in the early stages of buying a commercial property (small hotel) and neighbouring residential units. Title to all the property is held by a limited company whose shares I am proposing to buy from the current shareholders. The assets and company are in an overseas country whose law is close to English law.

The proposed heads of terms state that at purchase the only liabilities of the company will be " residual shareholder loans". AFAIU the operation of the Hotel was NOT carried out by the company, the hotel being leased to third party operators.

This is the first time I have purchased a controlling stake / all the shares in a company. So a few rookie questions:

1. I assume that on purchase I as the new director can simply pay off the residual shareholder loans using the funds of the purchased company. But why can't the current directors deal with those loans now? I presume because liquid funds are not available... is that logical?
2. What documents can I demand to view to satisfy myself that there are no further liabilities? I of course don't want to end up liable for unpaid taxes, municipal debts or other claims on the company. Puchasing the shares on the face of it looks like less hassle than transferring the properties themselves, but I'm somewhat aware of the pitfalls.
3. What documents and actions should I take to ensure that the assets claimed to be held are in fact held and unencumbered? Is it enough to obtain copies of title deeds from the land registry?
4. Although conveyancing is not necessary, I intend to carry out local authority searches and obtain structural surveys. What other due diligence is essential?


Thanks in advance.


GS

Clitheroekid
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Re: Purchasing property business

#65955

Postby Clitheroekid » July 10th, 2017, 1:19 am

Purchasing the shares on the face of it looks like less hassle than transferring the properties themselves, but I'm somewhat aware of the pitfalls.

It actually isn't. It may be simpler in documentation terms, as there is no need for conveyancing of the properties. But when you buy a company you buy whatever horrors are lurking within it, which is why there has to be very detailed investigation to flush out any that may exist - the process called due diligence.

For all you know a winding up petition may have been issued last week, or they may just have received notification of a claim for £1m or a letter from HMRC notifying them that they've underpaid their taxes for the last 6 years, or they could have agreed a lease of the hotel to a friend of the MD for 10% of its market rent, etc etc.

When you buy the company you take it subject to all such matters.

A typical questionnaire that I use for DD on a company purchase runs to 10 pages or more, and contains questions such as:

Please confirm that the Company, for VAT purposes: (a) is registered but is not, and has not been, a member of a group of companies; (b) has not been required to give security for payment of VAT or for customs duties and/or is not required to pay amounts on account of VAT under any order made under section 28 of the Value Added Tax Act 1994 (the "VATA"); (c) has maintained and obtained complete, correct and up-to-date records, invoices and other documents appropriate or requisite for VAT purposes and has preserved such records, invoices and other documents in such form and for such periods as is required; (d) has incurred no penalties and received no warnings in relation to the late submission of returns or payment to HMRC; (e) owns no assets to which Part XV of the VAT Regulations 1995 (capital goods scheme) may apply; and (f) has neither opted to tax nor made a real estate election within the meaning of Schedule 10 to the VATA.

That's just one of well over 100 questions, but it shows the level of detail that's gone into.

And another crucial part of buying a company is that you really need to obtain a whole series of warranties and indemnities from the selling shareholders. Warranties are written assurances about the company to cover points that you can't discover through due diligence, such as a warranty that they aren't aware of any impending litigation. Indemnities are promises to pay liabilities that the company may have, such as tax.

These are your insurance policy. If you buy the company and find any nasties you should be able to sue the shareholders for compensation. Without those warranties and indemnities it's caveat emptor.

The assets and company are in an overseas country whose law is close to English law.

Not the BVI or Seychelles by any chance? Sunny places full of shady people. That's another layer of concern, as not only are many offshore companies inherently dodgy but being `close' to English law is a long way from being the same as English law, and a small difference in the law could make a drastic difference to the outcome.

As I assume from the description of the purchase that you're looking at shelling out hundreds of thousands of pounds if not millions you would be frankly insane to go ahead without competent professional advice from both corporate lawyers and accountants.

Alaric
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Re: Purchasing property business

#65957

Postby Alaric » July 10th, 2017, 1:30 am

Clitheroekid wrote:It actually isn't. It may be simpler in documentation terms, as there is no need for conveyancing of the properties.


In my memory, this dates back to the days of Jim Slater who discovered that the dodge of wrapping an individual property into a shell company could make the process of buying and selling that much simpler. If it wasn't for the numerous exemptions available for personal holding of property, it could make sense to this day for residential property.

If a Government ever wanted to make the process of buying and selling residential property simpler and quicker, exploring the notion that you own a property through a Company would be the way to go, the legal process of buying and selling Companies being simplified.

But companies have their own legal personalities, so unless you are certain that you are buying a shell, who knows what lurks beneath the surface.

GoSeigen
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Re: Purchasing property business

#66206

Postby GoSeigen » July 10th, 2017, 9:38 pm

Clitheroekid wrote:
Purchasing the shares on the face of it looks like less hassle than transferring the properties themselves, but I'm somewhat aware of the pitfalls.

It actually isn't. It may be simpler in documentation terms, as there is no need for conveyancing of the properties. But when you buy a company you buy whatever horrors are lurking within it, which is why there has to be very detailed investigation to flush out any that may exist - the process called due diligence.


Okay, so I guess the alternative is to start incoprporate our own company and have the company purchase title to the properties. This should actually be fairly straightforward as there are only two titles involved.

The disdvantages? I guess the extra work creating the company and doing the conveyancing, plus the legal and other costs. If the vendor's claims about the absence of debt are true, then we presumably could expect to pay approximately the same price as if we'd purchased the shares. (Assuming the company had no other valuable assets or business).


Another question: We also plan to operate the Hotel and wish to trade using the hotel's existing name so I guess we should contract separately regarding that?


GS

GoSeigen
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Re: Purchasing property business

#67944

Postby GoSeigen » July 17th, 2017, 5:00 pm

Clitherokid,

Thanks for the good advice. We are now at an advanced stage of negotiations -- we declined to buy the company and negotiated a purchase of the property assets. Good choice because the whole company and its history stinks. The assets themselves are good at the price and exactly what we want. However, the sellers have been leasing out the property for years without ever getting necessary vital and legally required safety certification -- capital investment has been nil for years and the property is in a neglected state. As a result remedial action to get the certification, which is also required for the transfer, is likely to be rather costly.

The sellers claim there will be no problem, at the same time insisting we take on the obligation for the certification. We, with the uncertainty involved, want them to take it on. It is anyway their legal obligation to hold the up-to-date certification at all times, failure to do so being an offence punishable by up to 12 months imprisonment, not to mention the risk to lives of their staff and customers. Yet they insist we take on the cost of something that is their responsibility in law.

Any thoughts on how we could get around this impasse? The options I see are:
-walk away
-offer more cash, but it may be a lot more!
-take the risk and see what happens

I don't think they'll accept a futher reduction.

Any bright ideas on negotiating tactics? By way of further background, we are negotiating with the two directors, who are also (small) minority shareholders. The overall deal was recommended to the shareholders by the directors and they have enough support for the required special resolution. However this certification issue has become a sticking point (arose during drafting of the contract and our due diligence). When I called one of the directors about it today he was _extremely_ defensive.

Please help!

GS

GoSeigen
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Re: Purchasing property business

#67950

Postby GoSeigen » July 17th, 2017, 5:36 pm

Ha ha, wrote that whole post and forgot to ask what I originally wanted to, namely, how about if we directly approached the largest shareholders, a married couple living abroad with 45% of the shares? We understand there is tension among the shareholders anyway, with the company already taking legal action against one of its minority holders. Would we be able to get the largest of them onside: the ones who originally built the business and would be sad to see the state it has been reduced to and the irresposible management by the director who has destroyed their company's value and is now threatening to pull the deal and board up the entire business?


GS

GoSeigen
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Re: Purchasing property business

#67988

Postby GoSeigen » July 17th, 2017, 8:39 pm

Is there any mileage in appealing directly to the shareholders in writing, and are the directors duty-bound to forward such a letter to the shareholders? After exhausting negotiation of course.


GS


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