Case Study: Property Consideration when Contemplating a Sale of an Industrial Factory/Warehouse (Part 1)

This is a case study of a Malaysian company that was in business for 30 years. It purchased an industrial property 5 years into the business for its own use. The value of the industrial property appreciated almost 400% over the years. The company now wishes to dispose the property, distribute the sales proceeds to the owners, and to finally wind-up its business as a solvent company.

In Part 1 of this case study series,  we explore the property related considerations in such an exercise from a buyer’s and seller’s perspective.

The company had 2 main options to choose from. First, to sell the industrial property leaving the company intact. Second, to sell the shares of the company along with the industrial property.

What are some considerations in these options?

Option 1 – Sale of Shares

A sale of shares involves a disposal of all the shares to a buyer, resulting in the buyer becoming the new shareholder of the Company. The Company remains as legal owner of the industrial property.

Buyer’s Perspective

There are some apparent advantages to this option for a buyer, which include:

1. Stamp Duty – in purchasing shares of the Company, the stamp duty will merely be a flat rate of 0.3% of the purchase price or market value of the shares, as opposed to the hefty stamp duty of up to 4% (above RM1 million) on a transfer of the industrial property alone.
2. Process – the process to effect a sale of shares is simpler compared to a conveyance of the property. A sale of shares generally only requires a Share Sale Agreement between parties, resolutions and a Form of Transfer of Securities under the Companies Act 2016. Buying a company could also involve legal and financial due diligence of the company.
3. Duration – the process of sale of shares is straightforward. The time period to complete a share sale can be in a matter of weeks, compared to a conveyance of property which may take 3 months to a year. As time is money, both buyer and seller will welcome a faster transaction.

Nonetheless, there are tax considerations that a buyer should consider when purchasing shares. In particular, the Company could be deemed as a real property company (“RPC”). If it is, the buyer needs to retain a sum from the purchase price and remit it to the Inland Revenue Board. Failing which, hefty penalties will be imposed. Further, the subsequent disposal of the RPC shares by the buyer could also attract real property gains tax (“RPGT”).

Seller’s Perspective

Likewise, the seller of RPC shares should also determine its RPGT exposure before the share sale. Assessing the RPGT exposure can be a complex task and we have previously written about it here. When selling RPC shares, the seller may also be foregoing the valuable allowable expenses incurred in improving the property itself (see below).

To a seller, disposing the company’s shares is quick and fast. It allows shareholders to receive cash proceeds from the buyer directly. A share sale also dispenses with the need to wind-up the company, which can take a couple of years.

As many advantages as this approach may have, the commercial reality is that it is difficult to find a party willing to purchase 100% shares of a company with a long operating record. This is due to the inherent historical liabilities present in the Company. Securing bank financing to acquire shares could also be more challenging compared to obtaining a loan to purchase the industrial property.

Option 2 – Sale of Property

There are also advantages to sell the industrial property on its own. These include:

1. Finding a buyer – it is generally easier to find a buyer to purchase the property on its own. It is easier for a buyer to obtain financing from banks for the purchase of the property, compared to obtaining financing for a share acquisition which will be at a higher lending rate.
2. Valuation – the valuation of the property will be simpler and can be done by a professional property valuer quickly. The valuation of shares or a business usually differs according to the various methods and the type of business.
3. RPGT – the seller is only exposed to the RPGT on the disposal of the property. Generally, this is determined by deducting the original acquisition price from the disposal price. However, the laws do provide for specific deductions such as expenditure incurred on the property to enhance or preserve the value of the property. Any expenditure incurred to preserve, maintain or defend the rights of ownership or right to the property could also count towards reducing the RPGT exposure. This is especially so if the factory was built on the empty industrial land purchased.

Based on the above, both options have their advantages and disadvantages. They need to be considered carefully.

We will discuss the practical steps to prepare for a sale of an industrial factory / warehouse in Part 2 of this series.

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This article was written by Shawn Ho and Natalie Ng.  Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds.  Feel free to contact us if you have any queries.