Introduction
Further to the previous articles I have written on due diligence when buying immovable properties this one focusses on due diligence when buying a property registered in the name of a company. There are two main ways such properties may be sold, namely:
- The company sells and transfers the property to the buyer, or
- Where there is only one property owned by the company, the seller may offer to sell 100% of the shares in the company such that the buyer will own shares in the company and ultimately the property.
This article focusses on the second scenario.
Ownership of the property
As standard practice a prospective purchaser or through his or her legal practitioner should inspect the deed of transfer to ensure the seller is the registered owner of the property. This is done through a deeds search at the Deeds Registry.
Ownership of the company
It is always important to establish the true owners of the selling company. Where the sellers are selling 100% of the shares in the company and effectively the property it is particularly important to know and deal with the authentic shareholders.
Section 153 of the Companies and Other Entities Act (Chapter 24:31) or “COBE Act” or “the Act” requires a company to issue share certificates to its shareholders. Further, according to section 153(3) of the COBE Act a share certificate shall be prima facie evidence of the title of the member to such shares.
However, many times it happens that no share certificates are ever issued and there will therefore be no share certificates to verify. If there are no share certificates and the sellers were the founding subscribers their details and shares will be reflected in the Memorandum of Association. This will be useful to the extent that they did not subsequently sell the shares.
Where a shelf company was bought and used to register the property and no share certificates were issued this gets a bit complex. The founding subscribers will not be the current shareholders or sellers. This may present serious risks to the transaction.
I advise that the prospective buyer or his or her legal practitioner should have sight of all the relevant paperwork from when the sellers acquired the shelf company. It is even better to insist on signed share transfer forms and share certificates in favour of the current shareholders and sellers. The share certificates in the names of the current sellers will then be cancelled upon sale of the shares to the prospective buyer.
It may provide extra assurance if the prospective buyer could get a copy of the agreement of sale when the company itself bought the property to ascertain who represented it then. If it was represented by the current sellers in capacity as directors this may present some degree of comfort.
Whether CR6 (formerly CR14) proves ownership
It is a common mistake in business dealings to this think that the CR6, formerly CR14, which is a register of directors, evidences ownership of shares in a company. Shareholding and directorship are quite distinct. Shareholders are the owners of the business and may appoint themselves or other people as directors. On the other hand directors are not necessarily shareholders. While it is common that shareholders are also directors in small to medium enterprises it should not be interpreted that directors are always shareholders.
Authority to sell
Where a property is being sold and transferred from the company to the buyer one should look out for:
- A resolution by the directors of the company to sell the property, and
- That the person representing the company is duly authorised by the directors.
Where the property is not being sold off the company but as part of the company whose 100% shareholding is being sold to a prospective buyer one should look out for:
- Whether the people selling the shares are indeed all the shareholders,
- Or in the case of agents, that they are duly authorized by all the shareholders.
Risk of liabilities against the company
While it may be easier or more convenient to buy shares in the property holding company there are risks associated with undeclared or subsequent liabilities such as unpaid taxes or even capital gains tax on the transaction. The shares or property may also have been pledged as security. The shares may even be subject of a dispute. This is why some investors prefer the property to be transferred out of the selling company.
Conclusion
When buying a property registered in the name of a company and parties wish to exchange 100% shares in the property holding company there is need for careful due diligence on ownership of the shares, property and authority to sell.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant in deal structuring and business valuer. He is also a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
