Corporate transactions: what’s the difference?

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How does selling an ‘enveloped property’ differ from a typical property sale? And what are the steps that need to be taken?

With Stamp Duty on shares sitting at just 0.5%, the benefits of using a corporate vehicle for a property transaction seem obvious. But because of the overheads of incorporating, corporate property sales have long been the preserve of the high-value commercial transactions, where the tax savings brought by incorporation can often outweigh the costs.

However, recent changes to Stamp Duty Land Tax have led many landowners to seek incorporation. In December, mortgage lender Kent Reliance revealed that mortgage applications made via limited companies had trebled year-on-year. In September, a luxury home in Regent’s Park was explicitly listed as being available via the purchase of its Guernsey-based holding company for £1 million below the original asking price.

Selling a property via a corporate transaction may result in the same final effect as selling the property itself, but from a legal perspective these two types of transactions differ significantly. Before going down the road of a corporate sale, buyers and sellers alike should understand how the process differs from a standard property sale.

In order to help navigate this process, here is a guide which explains the corporate sale process step-by-step and flags up the key differences between a corporate and a property sale.

Step 1: Heads of Terms

Once the two sides have confirmed their appetite to conduct a transaction, the buyer typically sets out its offer in “heads of terms”, which are then negotiated and signed by the seller. These terms are usually non-binding, but legal input is strongly recommended at this stage to ensure the terms don’t contain any ‘nasties’ it may be difficult to negotiate back from at a later date.

Step 2: Due Diligence

The biggest difference between a property sale and a corporate sale is the huge amount of due diligence involved. In contrast to a property sale, when a buyer cherry picks the precise details of what he requires, the buyer in a corporate transaction is acquiring all the target assets and liabilities of the target company, whether or not he is aware of them.

So, once heads of terms are signed, the buyer’s solicitors will issue a due diligence questionnaire, setting out a large number of questions to be completed by the seller, who also provides to the buyer any supporting documentation for review.

Step 3: Share Purchase Agreement and Tax Deed

In contrast to a property transaction, which typically relies on replies to standard enquiries, the buyer in a corporate transaction will expect a comparatively huge array of contractual statements of fact, known as “warranties”, backing up the information it uncovers as part of the due diligence process. These warranties, which are included as an annex of the Share Purchase Agreement, are far ranging, and will cover the whole life of the company, including incorporation, structure, finances and accounting, employees, key contracts and trading activity, tax and litigation to name but a few.

Unlike a property transaction, a company sale will also include a tax deed alongside the share purchase agreement. This enables the buyer to recover on a pound-for-pound basis any tax liabilities that arise after closing, but relate to the period pre-closing. These two documents are then reviewed and negotiated by the seller’s solicitors.

Step 4: Disclosure Letter

Once the share purchase agreement and the tax deed are settled, the seller’s solicitor will liaise closely with the seller to prepare a disclosure letter to sit alongside the warranty schedule arrived at in the due diligence process. This is a negotiated document, but the principle is that the buyer will not be able to bring a claim for breach of warranty if the matter is clearly referred to the disclosure letter.

Top tip for sellers: Due Diligence is Critical

A seller can assist itself greatly by ensuring that the company’s paperwork is all in order before the due diligence questionnaire is received. If not, the process can drag on considerably and legal costs can mount.

We strongly recommend that, in anticipation of this, the seller undertakes a thorough audit of its records to ensure that everything is in order and any blanks are identified and, if appropriate, dealt with.

This audit should include:

  • the company’s statutory books and records
  • its annual and management accounts
  • tax returns
  • key contracts
  • assets (including intellectual property, if any)
  • insurance
  • any consents required to operate
  • details of any ongoing or historic litigation
  • employees and pensions