This article aims to provide a brief legal analysis on the possibility to sell securities and assets not at fair market value, under the international commercial principles. Typically, assets are sold at fair market value, which is defined as the price at which the asset would sell in an open and competitive market. This principle aims to ensure that all parties are treated equitably. Non-fair market value refers to the stated or face value of an asset or security, often representing a fraction of its market value. When examining the commercial rationale of such a transaction at non-fair market value, one must consider also other factors which might constitute adequate benefit. The sale of assets at nominal value or not at fair market value, especially in a non-arm’s length transaction, may be legally valid subject to the applicable law, provided essential conditions are met to ensure legitimacy and compliance. This analysis considers the transaction’s adherence to international commercial principles, such as the arm’s length standard, fairness in pricing and commercial justification.
1) Freedom of Contract
The principle of freedom to contract allows parties to agree on terms that suit their interests, including the price at which assets are sold. This principle is fundamental in both domestic and international commercial law. However, this freedom is limited by laws designed to protect against fraud and to uphold creditor rights. In particular, transactions must not contravene existing laws or regulatory requirements, such as those prohibiting fraudulent conveyance or preferential treatment of certain creditors.
2) Good Faith and Fair Dealing
International transactions such as the one examined here, must be executed in good faith and reflect a commitment to fair dealing. This principle is embedded in various commercial agreements and is a fundamental expectation under both common law and international commercial frameworks.
According to the UNIDROIT Principles of International Commercial Contracts (hereinafter referred to as “UNIDROIT”), transactions should reflect good faith and fair dealing. Article 1.7 of the UNIDROIT Principles states that parties must act in accordance with good faith and fair dealing, which could be called into question if the sale lacks commercial rationale.
3) Arm’s Length Principle
The arm’s length principle is a foundational concept in commercial law, emphasizing that transactions should be conducted as if the parties were unrelated, thereby ensuring fair value and protecting against conflicts of interest. Selling assets at non-fair market value, particularly when the parties have close personal or familial relationships, raises questions about the transaction’s intent and fairness.
The case of Re MC Bacon Ltd (1990) BCC 78 illustrates the risks associated with transactions conducted below market value. In this case, the court scrutinized transactions that did not align with fair market value, emphasizing the need to protect creditors’ rights. The ruling highlighted that directors must ensure transactions serve the company’s best interests, particularly in the context of creditor protection during insolvency.
4) Beneficial Ownership Considerations in non-fair market value Sales
In the context of transactions involving the sale of securities and assets at non-fair market value, the principles of beneficial ownership play a critical role in ensuring compliance with legal and regulatory obligations, particularly as outlined by the international standards established by the Financial Action Task Force. The FATF’s strengthened beneficial ownership standards emphasize the importance of transparency in identifying the true owners behind corporate structures and legal arrangements, such as trusts. This transparency is vital for preventing the misuse of non-fair market value sales to disguise illicit activities, such as money laundering or tax evasion.
According to FATF, to mitigate risks associated with non-fair market value sales, it is essential that all transactions are meticulously documented. This documentation should clearly outline the beneficiaries of the transaction, the rationale behind the non-fair market value pricing, and the overall purpose of the asset transfer. In particular, the revised FATF Recommendations 24 and 25 call for enhanced transparency regarding beneficial ownership, aiming to close loopholes that allow for the concealment of illicit activities within complex corporate structures. As a result, any asset transfer that seems to bypass fair market value standards may attract scrutiny and be questioned regarding its legitimacy. This means that if a transaction looks like it’s trying to hide the true value of the assets involved, it could be investigated more closely to ensure compliance with legal and regulatory standards.
Furthermore, compliance with the FATF guidelines will require a thorough assessment of potential risks linked to the beneficiaries involved in the transaction. The FATF’s guidance, which was developed through extensive consultation with stakeholders, underscores the need for countries to actively work to prevent shell companies and other legal arrangements from serving as vehicles for illicit proceeds.
Therefore, in conducting non-fair market value sales, it is imperative to ensure that these transactions do not inadvertently facilitate financial crime. The directors of the Company must demonstrate that they have undertaken appropriate due diligence in verifying the identities of the purchaser and the beneficiaries of the transactions and have thoroughly assessed the implications of the transactions. This approach will not only help maintain compliance with both local and international standards but will also safeguard against potential legal liabilities that could arise from the mischaracterization of asset transfers.
5) Compliance with IFRS 13
IFRS 13 provides a framework for measuring fair value, emphasizing the need for a clear understanding of how to determine asset value, even when the assets are not actively traded. For the Company, when selling these assets at non-fair market value, it is crucial to provide a well-documented rationale that reflects the true economic value of the assets, taking into account factors such as recent appraisals, comparable transactions, or other valuation methods. A significant discrepancy between the non-fair market sale price and the estimated fair value could raise concerns regarding the appropriateness of the transaction and may expose the company to legal challenges related to the directors’ fiduciary duties.
In light of IFRS 13, any asset transfer at non-fair market value must be transparent and grounded in sound reasoning. This diligence will help demonstrate that the transaction is conducted in good faith and for legitimate business purposes, thereby protecting the interests of the company and its creditors.
From an AML law perspective, transactions conducted without commercial rationale or adequate consideration may raise significant red flags, as they could be classified as “sham transactions”. Sham transactions are defined as deals with little to no genuine business purpose, often structured in ways that could obscure the true ownership of assets, disguise the origin of funds, or avoid regulatory scrutiny. In such cases, AML regulations require heightened scrutiny to determine if the transaction is structured to manipulate the asset’s reported value or mislead stakeholders, including authorities or potential creditors.
Therefore, always subject to the applicable laws:
Transferring assets at non-fair market value could be permissible if there are no creditors whose interests might be compromised, the asset transfer is documented transparently, aligning with the winding-down objectives and the action is ultimately in the shareholders’ best interests. Such a transfer must be justifiable for serving the Company’s best interests and to record transparent explanation for why non-fair market value sales are being used instead of market value sales.
For CONSTANTINOU PANAYIOTOU & CO LLC
Georgia Constantinou-Panayiotou
Founding/Managing Partner
and
Marianna Christofides
Lawyer, LL.M
This article does not constitute a legal opinion or advice. It is merely for educational purposes. Independent legal advice should be obtained from experts, particularly with regards to the relevant laws of other jurisdictions.
