1. Building Trust: Honesty and Transparency are Key

The Reality: Unfamiliarity and Lack of Trust

In the licensed corporation transaction market, buyers and sellers often meet through intermediaries and usually have no prior working relationship. This lack of familiarity can create suspicion and cause deals to fall through.

Practical Ways to Build Trust

1. Clarifying Background and Transaction Intent:
   • Buyers should explain their reasons for the acquisition, such as business expansion, licence integration, or simply acquiring a clean licence.
   • Sellers should be open about their reasons for selling, such as business restructuring, cash flow needs, or shareholder changes.
2. Sharing Basic Information:
   • It is not necessary to disclose everything upfront, but providing basic company details can help the other party conduct preliminary checks and ease concerns.
3. Being Realistic About Company Flaws:
   • Older companies may have minor issues like tax discrepancies, employee pensions, or incomplete records.
   • Both parties should accept that no company is perfect and instead focus on whether the price and risks are reasonable.
4. Why Sign an MOU (Memorandum of Understanding)?

Purpose of an MOU

1. Once both parties have a preliminary agreement, an MOU can be signed to outline transaction terms and the process.
2. While typically non-binding, an MOU can become legally binding if it includes a deposit clause or states its legal effect.

Deposit Arrangements

1. Buyer Showing Good Faith:
   • Buyers often pay a deposit upon signing the MOU to demonstrate commitment.
2. Seller’s Concerns:
   • Sellers worry buyers may back out after due diligence, wasting time.
   • If the deposit is held by the buyer’s solicitor, the seller may worry about accessing the funds.
3. Common Market Practice:
   • Buyers usually pay a small deposit directly to sellers (e.g., 5%-15%) and agree it is non-refundable if they back out.
   • This is simpler than solicitor escrow and is generally more acceptable to sellers.
4. Due Diligence (DD): Documents, Timelines, and Standards
5. Preparing Documents in Advance:
   • Buyers should provide a checklist before signing the MOU, giving sellers time to prepare.
   • Agree on a DD deadline, e.g., sellers provide documents by a set date, and buyers complete DD within a specified period.
6. Due Diligence Approaches:
   • Legal/Accounting Firms: Suitable for large deals; they provide comprehensive checks on finance, legal, and compliance.
   • Self-checks: For smaller companies or trusted parties, reviewing financials, contracts, and public records may suffice, but risk assessment is essential.
7. Managing Risks:
   • State in the MOU how issues found during DD will be handled.
   • Include an exit clause: If either party delays or withholds documents, the other can terminate, with deposit arrangements clarified.
8. Signing the SPA (Share Purchase Agreement) and Completion
9. Drafting the SPA:
   • After signing the MOU, both parties can start drafting the SPA, covering price, payment terms, completion date, and breach clauses.
10. Verifying Bank Accounts:
    • Before completion, buyers should confirm the company’s bank balance and debts to avoid post-transaction surprises.
    • Even if the company holds little cash, sellers should provide written proof of the account balance.
11. Staff and Business Handover:
    • RO (Responsible Officer) and Senior Management: If continuity is needed, the SPA should specify their retention period, duties, and remuneration.
    • Systems and Customer Data: Plan handover procedures early to ensure business operations are not disrupted.
12. Completion Process:
    • Same-day Completion: Transfer shares and pay the balance simultaneously. Update the register of members and business registration.
    • Payment Methods:
      • Preferably use a cashier’s order (bank draft).
      • Avoid third-party accounts to reduce fund transfer risks.
13. Mindset of Buyers and Sellers: Honesty, Pragmatism, and Win-Win
14. Honest Collaboration:
    • Though their goals differ, both parties ultimately want a successful transaction.
    • Raise questions promptly; do not conceal doubts to prevent later disputes.
15. Accepting Imperfection:
    • Established companies often have some legacy issues. Buyers should be realistic and weigh price against risk.
    • Sellers should be transparent and provide complete information to reassure buyers.
16. Dealing with Intermediaries:
    • Intermediaries can be helpful but may also inflate prices.
    • Clarify commission terms early to avoid affecting the deal.
17. Post-Transaction Integration:
    • Buyers acquiring for expansion should plan for integrating staff and customers.
    • Sellers wanting ongoing involvement can negotiate retained equity or cooperation terms.
18. Conclusion

The success of licensed corporation or equity transactions depends more on attitude and trust than on contracts alone.

1. Build Trust: Communicate openly about backgrounds and intentions.
2. Clear Process: Set timelines and responsibilities for MOU, deposit, DD, SPA, and completion.
3. Practical Attitude: Accept that companies may have issues; assess risk versus reward.
4. Same-day Completion: Transfer shares and pay funds simultaneously to avoid complications.

Following these steps improves the chances of a successful transaction, even between unfamiliar parties, and leads to a mutually beneficial outcome.