Speaker 1
Hi, so just doing a Q&A video from questions that have been emailed into the Harbour Club by previous delegates. One of them just wanted some clarity SPV. They understand how you register an SPV and how simple it is to set up a limited company. But they weren’t quite sure on why you should use an SPV instead of just doing the deal yourself.
Speaker 1
And there’s a few reasons for this. So the key one, the most important one is that any contract you ever enter into carries risk. There is performance risk associated with the contract that means effectively you can be sued for breach of contract in the future. So purchasing a company or doing a deal with a company is a contract. And so there’s two sides to a contract. There’s the two people signing it and if there’s a breach of contract, they could sue each other.
Speaker 1
So very simply, if one side is an SPV. So if one side is a limited company that has no assets, no trading history, it really doesn’t matter if it gets sued. So it’s a simple asset protection measure to engage in commercial relationships through a limited liability company. Limited liability by definition means that your liability is limited to the share capital that you contributed to the company when you set it up. So depending on the jurisdiction, that can be as little as a dollar. So it’s well worth setting up a, an SPV company, a standalone limited company that just sits there waiting for you to engage in a transaction.
Speaker 1
And I know it’s really tempting, particularly when you’ve got a company already that’s doing millions of turnover and you’re empire building so you want to make that company as big as possible to use that company to go and execute the transaction. But if you think about it, and I’ll give you a great example of this.
Speaker 1
I had a friend who had a telecoms company and he used this telecoms company. It was a big telecoms company. He used this telecoms company to buy one of his competitors and they spent hundreds of thousands of pounds on due diligence. They used a large accounting firm to do all of their due diligence for them and a legal firm as well. And after six months of due diligence and hundreds of thousands of pounds worth of due diligence, it was agreed that everything was fine and they could go ahead and buy this company.
Speaker 1
They bought the company and as soon as the ink dried on the paper, an ex employee who wasn’t even there during the purchase process and wasn’t even in the company during the due diligence process, so the name never even came up because they were somebody that had left the company six months before, filed a sexual harassment claim against the company that had bought them.
Speaker 1
Now under European law, there’s a thing called TUPE, Transfer of Undertakings for the Protection of Employment, which means that when you buy a company, the employee rights transfer to the company before you. So effectively, even though this person had never worked for the company and weren’t even there during the due diligence process, they were able to successfully sue the company for sexual harassment and won a six figure settlement for that sexual harassment. So had that transaction been conducted through an SPV, they probably wouldn’t have even bought the case because the reason they bought the case was they suddenly saw that there was this big viable target for litigation.
Speaker 1
It’s a bit like when Google bought YouTube. YouTube had loads of potentially illegal content on it, or certainly copyright infringing content on it, but nobody ever bothered because it was a startup with no revenue. As soon as Google bought it, all of a sudden it was worth suing them. So Google had this huge multi billion dollar lawsuit against them for all of this content that was being published on them on YouTube.
Speaker 1
So by basically providing a solvent target, either yourself or your company, you could open yourself up to either real litigation or just vexatious litigation, which would be a big pain in the ass. So using an SPV as that barrier between you and the transaction is a really useful thing to do. And it also gives lots of other opportunities in the future to move assets around or to to sell the ultimate beneficial owner, which is the SPV on to the next party.
Speaker 1
So when we talked about the CVA, for example, that’s quite a handy strategy in there. So I hope that put some meat on the bone for you around SPVs and do remember just email in any questions that you might have and I’ll be happy to do a little video to cover it.
