[Buying property through shares transfer in a company] What you need to know about actual operation and hidden risks

There are numerous big-ticket  property transactions in the market with values that exceed HK$10 million. These properties are often held by companies. What is it really like to purchase a property through shares transfer in a company?

Individual investors may avoid paying stamp duty through relevant methods and also avoid payment of special  stamp duty in restricted resale transactions within 36 months. However, transferring shares in a company  is more complicated than general property trading. What are the trading procedures and associated risks?

Perform due diligence first before purchasing a property owned by a company

Compared with the general direct  property trading, buying and selling properties held by a company means that the buyer directly buys the company’s shares while ownership of the property is held by that company.

Because of the  necessary shares transfer which also needs the buyer to acquire or purchase the parent of the company which holds the property, a property agency』s provisional sale and purchase agreement is insufficient to cover adequately this type of transaction. A lawyer, who specializes in handling this type of transaction, must be employed.

Three key things that a lawyer needs to do

After the buyer finds a lawyer to represent him or her, the lawyer has to do the following three important services for the buyer; specifically conducting due diligence, asking the property seller or vendor to issue a statement and warranty, and requesting the seller to provide indemity.

Conducting due diligence entails lawyers looking into or scrutinising if the company, which owns the property, has hidden debts. If the company, which owns the property has debts, these debts need to be audited. The lawyer will later  ask the seller to sign a guarantee, stating that to his knowledge, the company has no debts, unpaid taxes, and is not involved in any litigation. At the same time, the lawyer who represents the buyer, will also require a declaration that if the company which owns the property is involved in any debt collection or litigation issues in the future, then the seller needs to compensate the buyer for any loss that might be incurred by the latter. The general  protection lies in the fact that any lawsuit involving a company, which owns a property, and which occurs within two years from the property’s sale is  the responsibility of the company’s previous shareholders.

Since far more tasks need to be done in  a property  owned by a company than that in an ordinary property transaction, fees charged relating to a company-held property are much higher, usually involving six digits, than those in ordinary transactions. Even if a buyer decides to terminate a sale-and-purchase  transaction if the seller does not sign the warranty, the former still has to pay part of the legal fees.

Process of transferring shares in a company

After providing relevant information, the general shares transfer process is as follows:

  1. The lawyer will ensure that any pre-emption rights have been exercised or waived
  2. Arrange for the shares transfer form to be signed by the buyer and the seller
  3. Submit the relevant forms and shares to the company and wait for the board of directors to approve the transfer
  4. Prepare relevant forms and the sales agreement form for stamping
  5. After the form is stamped, the buyer’s details will be confirmed and registered with  the Company Registry. After successful registration, the entire company shares transfer process will be deemed complete.

Companies with mortgages need to repay these mortgages first

It is worth noting that if a property held by a company still has an outstanding mortgage, that property cannot be sold by way of company shares transfer, as all outstanding amounts in the mortgage need to be paid first. At the same time, banks generally do not provide mortgage loans before the company completes the transfer. In this type of situation, a buyer needs to pay in full for a property that is being purchased. However, there are also banks that provide bridge loans to buyers, but at  higher than normal interest rates. After the transaction is completed, the buyer becomes a company shareholder who can act as a guarantor to apply for a mortgage loan for the property for the purpose of reducing the loan interest rate.

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