A group of Israeli investors were interested in buying and renovating a hotel in Paphos. The hotel was owned by a company whose shares had been foreclosed by the Alpha Bank, giving the bank the ultimate ownership and control of the hotel and had been rented out to a unconnected company in Cyprus.
The value for the owners was in both acquiring the hotel at a lower than market value price but also in approximately doubling its capacity and in creating a new category of offering in Cyprus tied to the businesses of the investors themselves. Since the investors had invested in hotels and other related businesses abroad, they would be able to sell the new Cyprus hotel as an additional offering. The investors’ “blue ocean strategy” though, rested on securing the acquisition of the hotel without legal defects and future pitfalls.
The due diligence process revealed three main issues. The first was employment. Hotel employees typically get transferred to the next owner of the business. This was something that would endanger the new business as issues culture, training and branding came into play. Accordingly, we liaised with the authorities on the treatment of our specific situation and obtained from them the factors on which they would assess their discretion. Building on that we obtained the tenant’s undertaking that it will utilize the former employees in another hotel and we severed all ties to the hotel operating as a going concern. Then we drafted and received proper warranties and indemnities from the Seller in the share purchase agreement.
The second main issue that arose was the Seller’s ability to honor its tax and other warranties and indemnities, being a special purpose vehicle. These could be guaranteed by the parent company of the Seller and an amount could be retained for future claims. The latter was objected by the Seller due to bank-specific directions but the Seller in return provided us with enough information on the assets of the Seller to prove its ability to honor the warranties and indemnities provided. Banks in Cyprus do not tend to change their structures such easily as the amounts they transact with in foreclosures since 2013 are in the hundreds of millions.
The third issue was the ability of the clients to get licenses for their intended use. To do this we went through a property due diligence process, examined the permits from the authorities and the subsequent changes and requested the architects employed to conduct the necessary work and provide the confirmations required.
In addition to the above, we successfully assisted the clients with the necessary agreements to provide finance to the company, helped them prepare the necessary banking information and concluded the banking due diligence, as a result of which the purchase money was transferred in a significantly shortened time period than normal. We also assessed the legitimacy of the financial past of the target company (including all the agreements in place, their share capital increase, the payment of the debt, the depreciation of the assets and the subsequent accounting provisions made).
The terms of the share purchase agreement were agreed and completion took place in approximately 60 days from the day of instruction. As a result, the clients closed down the hotel and have taken construction offers for the renovation and construction work needed on time with their plans.
The case was handled by Mr Gregoris Philippou and Mrs Rafaella Demetriadou