Advise on SOFE Holdings Transactions - Paper Example

Introduction

As the in-house legal advisor for Samantha's Organic Food Emporium Holding Ltd (SOFE Holdings), it is my responsibility to advise the company before it enters into contracts. My advice includes on transaction viability, how the contract affects the shareholders and her subsidiary companies. In my line of duty, I advise SOFE Holdings accordingly before she enters into the following contracts.

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Buying the Whole Building or One Floor

Samantha's father has expressed his willingness to sell an office building to SOFE Holdings. The property is in pristine condition, and the location is ideal for the company operations. The seller is willing to sell the whole building for PS250, 000 or one floor at PS95,000.

The first thing we look into is the acquisition costs. These are taxes and fees you pay when you buy land and properties in the United Kingdom. The taxes are applied according to the Stamp Duty Land Tax (SDLT). The rate is fixed at a minimum of 0% for commercial properties worth less than PS150,000 and a maximum of 4% for properties worth more than PS500,001 (Brown 2016). Fees payable on purchase are search fees, land register fees, building surveyors fee, and valuation fees.

If the company opts to buy the whole building, it will liable to maintaining the property in great condition. This will need the company to comply with health and safety measures and ensure the environment is protected as well. The Climate Change Act 2008 encourages property owners in the UK to Minimize Greenhouse Gas Emissions (GHG) (Brown 2016). All visitors to the property will be under the care of the SOFE Holdings. On the other hand, should SOFE Holdings opt to buy one floor, the responsibilities of meeting health and safety standards will be on Samantha's father, the building's owner. However, if the company acquire the building and lease it out, those responsibilities will be passed on to the tenants.

Further, the company should be careful not to tie its liquidity in purchasing this property. This is to avoid leaving the company unable to meet its day to day financial obligations. In the same breath, having an asset that the company can sell when it needs money is always a good thing. However, it is important to note that selling real estate at a profit gets hard when the market is experiencing a slump.

There is a great need to ensure acquisition of this building aligns with the long-term goals of SOFE Holdings. As such, the best thing to do in this scenario is to carefully evaluate the growth projections of the company in the first 12 months after buying the building. This will indicate whether the company can afford to purchase the building, or it will have to settle for one floor of office space. Overstating growth projections or understating them will leave the company with either financial obligations it can't meet or more space than it needs for its operations.

Next we evaluate the company's ability to make down payment for the property and the acquisition costs. The company's net asset value is PS900,000. The selling price for the whole building is PS250,000. The company can comfortably afford a down payment for the building, the SDLT duty (1 percent of the cost of the building), and the acquisition costs which follows buying the land.

The company stands to gain more by buying the whole building as opposed to those of purchasing a single floor in the building. For starters, purchasing single floor at PS95,000 is comparatively more expensive than buying the whole building at PS250,000. In addition to enjoying fixed costs, the company stands to benefit greatly in the event that the company leases out the extra space to tenants, having a paid off mortgage and having invested in an asset whose value will ever increase. Other investment benefits are inclusive of depreciation of property tax and asset appreciation. The company is also in control of the cost of rental overheads as compared when it is leasing. When on a lease, overheads tend to fluctuate wildly as a result of the unstable real estate markets.

The acquisition of this building or floor space will need the approval of the shareholders. Other than that, the purchase has no ramifications on the shareholders. As long as clear communication lines are maintained between the customers, it should pose no problem to the management of SOFE holdings.

Baring in mind the above facts, I recommend that SOFE holdings purchase the whole building from Samantha's father. The benefits of owning the whole building by far outweigh the benefits of owning one-floor office space. Owning the whole building will enable the company to plan for its expansion, reduce overhead costs, increase company revenue in terms of rent and it is a solid investment for the future.

Joshua Purchasing a Flat in SOFE Holdings' Building

Joshua Prince, a minority SOFE Holdings shareholder (24%) wishes to buy a flat in the building purchased by the company. The flat needs a flat deposit of PS15,000, which he is unable to raise. As such, he has requested the board to loan him the money.

A loan to shareholders is given based on their employment status, not the number of shares they own in a company (Lee 1970). In this case, Joshua has to provide his employment records to the board to qualify for the loan. If he cannot satisfy this requirement, he will be ineligible for the advance he had requested.

Before authorizing giving of loans to creditors, the board needs to ensure he fulfills certain criteria. The board, on behalf of the company, needs to launch an accurate and legally permissible investigation. The inquiry will show Joshua's solvency, his creditworthiness and similar issues which will help the board decide whether to proceed (CREFC 2013).

If Joshua qualifies for the loan, it is imperative that the board inform him failure to service his loan would result in more taxation as he would have had he received his dividends. Therefore, the company must include the loan in Joshua's income for the taxation year.

If Joshua has a good credit rating, is formally employed, and can pay the loan in good time, the board should consider his loan application. Otherwise, he should be encouraged to look for an alternative source of funding for the apartment.

Samantha's Guarantee on Behalf of New Supplier

Samantha Meldrum has been requested to offer personal guarantee to anew supplier of organic food to the group. Samantha agrees to be liable for the non-performance of the new supplier. It is worth noting that personal guarantee is an unsecured liability. She will meet all the obligation of the company should the supplier fail to keep their end of the bargain. Generally, personal guarantees result in primary liability on the director to meet the resulting debt. As a director of SOFE Holdings, the guarantee has the following implications.

One, Samantha will be giving the guarantee as a director of the company. As such, should she decide to resign from her post as the director of SOFE Holdings, the incoming director will be contractually bound by this agreement. To avoid this from happening, Samantha should insist with the supplier that the guarantee is lifted the moment she is no longer a director.

Secondly, the business model of SOFE Holdings keeps Samantha's assets separate from the companies. However, should she agree to give a personal guarantee on behalf of the new supplier, her assets can be recovered to settle the debts the supplier accrued. If the new supplier does not have a good rating, then it is pointless risking her assets.

Lastly, should anything happen and the company becomes insolvent, Samantha will be required by creditors to pay the full amount owed, probably with the interests and charges added on top. In this case, Samantha Meldrum should avoid signing as the new suppliers guarantors until she is positive they will be able to pay back the loan.

Should the Company Guarantee Joshua’s Loan?

Joshua failed to qualify for a company loan. In order to buy his flat, he will have to borrow using the bank as his security guarantor. The company can guarantee for this loan as the director is purchasing the flat with the intention of spending more time in the company premises.

To ensure that Joshua services his loan to avoid trapping the company in loan default cases, the company should tie Joshua's shares with the loan. As such, part of Joshua's dividends goes to servicing the loan.

References

Brown, M. (2016). A Brief Legal Guide to Investing in Real Estate in the UK. Mayer Brown.

CREFC (2013). Guidelines for Due Diligence On Real Estate In The UK. Commercial Real Estate Finance Council Europe.

Lee, J. W. (1970). Shareholder Withdrawal-Loan or Dividend: Repayments, Estoppel, and Other Anomolies.

Wm. & Mary L. Rev., 12, 512.Isaac, D. (1998). Property investment. In Property Investment(pp. 1-27). Palgrave, London.

Atkins, M. H., & Lowe, J. F. (1997). Sizing up the small firm: UK and Australian experience. International Small Business Journal, 15(3), 42-55.

Barnard, J. W. (1988). Corporate Loans to Directors and Officers: Every Business Now a Bank. Wis. L. Rev., 237.