Why not buy the superyacht owning company?

Buying a superyacht can involve a surprising amount of paperwork and procedures. And possible delays where documents are missing. Surely the solution’s obvious – just buy the owning company. You’d be transferring just one asset: the share capital. The yacht itself stays exactly where it is, in the same ownership structure, and all the underlying contracts, licences, and arrangements continue undisturbed. There’re no ownership transfer formalities and no requirement to obtain third-party consents. The whole transaction can be completed with little more than a stock transfer form. So, why not?

THE GREAT UNKNOWN

Unlike a yacht, a company doesn’t just sit there looking magnificent. It has a past. It has signed things, promised things, owed things, and possibly upset people in ways you know nothing about. When you purchase shares in a company, you acquire all that company’s liabilities and obligations, whether past, present, or future, and whether known or unknown. The company has a separate legal personality from its shareholders, so ownership of its assets does not change hands: you simply become the owner of the legal entity that holds them.

Perhaps most notably, on a share purchase, the buyer inherits the company’s entire tax history – and liabilities. Imagine a yacht operating in the Mediterranean. For years, it has been cruising the waters of France, Italy, Spain, and Greece. Each jurisdiction has its own VAT rules. The company has taken positions that appeared reasonable at the time. Years later a tax authority disagrees. If you purchased the shares, congratulations. You are now the proud owner of an argument between experts that began before you even knew the yacht existed.

MITIGATING EXPOSURE

A buyer could attempt to mitigate exposure by requiring extensive warranties and indemnities in the share purchase agreement, or through a price reduction. But such agreements only bind the contracting parties and cannot be enforced against the company’s creditors. Breach of warranty claims are costly and time-consuming to enforce, and ultimately worthless if the seller lacks the financial substance to meet the claim – which, as a Special Purpose Vehicle, no longer with any assets, is highly likely.

An extensive due diligence exercise could be undertaken, examining accounts, tax filings, charter records, and insurance history – but this would be expensive, time-consuming, and probably inconclusive. Which is what you’ve been looking to avoid.

CLEAR THE DECKS

By contrast, with a pure asset purchase, the buyer generally does not take on the seller’s tax or other liabilities. The buyer takes the yacht. The seller keeps the history. The de-registration and re-registration process provides confirmation that any existing registered mortgage has been discharged. The buyer can create a fresh ownership structure with a new company, new registration, new insurance, and a new crew. There is no need to negotiate a tax covenant to protect against pre-completion tax liabilities.

Also, consider the lender’s position. A bank financing a yacht to the tune of tens of millions wants security. A tangible thing. A thing it can arrest and sell if everything goes wrong. The bank does not particularly want exposure to an obscure corporate history involving VAT returns filed by somebody in Croatia three years ago. Asset purchases are cleaner. The lender receives a fresh mortgage, and fresh security documents. Everyone starts from a known position.

IMPERFECT PANACEA

Under maritime law, liens can always attach directly to the vessel itself – not the owning company. Crew wages, marina charges, and repair claims will survive a change of ownership of the yacht even if you, as purchaser, have had no notice of them. Liens also rank in priority ahead of mortgages, and the holder of the lien also has the right to arrest the vessel – which can prevent it from generating any charter income or even being used.

So, while buying just the asset is better, it’s far from foolproof.

The buyer’s due diligence should specifically investigate whether any liens have arisen from unpaid crew wages, collision damage, salvage claims, or other maritime incidents. The buyer must take steps to ensure these are cleared before completion. The purchase agreement should require the seller to discharge all maritime liens as a condition of completion.

A judicial sale of the ship by court order normally removes any liens from the title, producing a clean asset for the purchaser.

IT HAPPENS

Buying just the shares can work – and it is quick and easy – but only where the buyer knows and seller and the yacht well enough to be certain there are no hidden liabilities. Indeed, it could be the better option where charters have been agreed. It would still be preferable to have a personal guarantee in place from the beneficial owner of the selling company.

TAKEAWAYS

From the seller’s perspective, a share purchase delivers a clean break from the company and its associated liabilities. On completion, all continuing obligations and liabilities remain with the company, and the seller’s post-transaction liability is generally limited to agreed warranties, indemnities, and covenants in the share purchase agreement. However, what is commercially attractive for the seller is precisely what makes share purchases risky for buyers.

For a buyer concerned about the extent of potential liabilities, or the risk of unknown contingent claims, an asset purchase offers the ability to acquire the yacht whilst leaving the corporate liability vehicle behind. The buyer acquires a clean asset, subject only to those liabilities which attach to the yacht itself by operation of law.

If you have questions or concerns about buying the superyacht owning company, please contact Benjamin Maltby.