You are anassociate at Elite Pathfinder LLP (“ELP”), a boutique law firm with five partners. The firm is led by its co-founders, Jessica Lin and Clara Lo.

Michael Wong, a previous client of ELP, is a seasoned investor and entrepreneur who conducts his business activities through a holding company, Prosperity Ventures Ltd. (“PVL”). It is unclear whether Michael is the sole shareholder of PVL. Several years ago, ELP assisted Michael in purchasing an industrial building in Kwun Tong.

Recently, Michael reached out to Clara about a new business opportunity. He plans to purchase Morning Brew Ltd. (“MBL”), a chain of coffee shops and bakeries operating across Hong Kong. MBL is currently owned by two siblings, Alex and Fiona Chan. Clara assigned you to handle the matter on her behalf.

During an initial Zoom meeting with you, Michael mentioned that he and MBL’s owners have already reached preliminary agreement on most of the key terms. However, Michael is concerned about being asked to sign preliminary agreements before he can access MBL’s operational and financial records. These preliminary agreements include:

1. A confidentiality agreement, and

2. An exclusivity agreement (“the agreements”).

MBL has also agreed to enter into a “non-compete” agreement with Michael after the preliminary agreements are finalized.

The sellers’ legal counsel, Cheng & Kwok LLP (“CK”), has drafted the Share Purchase Agreement (SPA). Michael has reviewed the SPA and is generally comfortable with its contents, but he would like to negotiate certain terms and propose a few additional clauses.

You have begun reviewing the file in preparation for a meeting with Michael, scheduled for ten days from now. The file contains:

• A copy of the draft SPA prepared by CK;

• Excerpts from the confidentiality and exclusivity agreements; and

• A scanned copy of Michael’s Hong Kong Identity Card.

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Last night, Clara sent you the following email:

Subject: Guidance for Michael Wong's MBL Matter

Thank you for taking the lead on the MBL transaction. As you know, I’m tied up with the arbitration case for Nexus Technologies and will be unavailable for the next two weeks. Jessica is aware of the status of this matter, but she is currently on leave in Europe. Only contact her in case of an emergency.

Michael’s wife, Diana, will join him at the meeting, and he has requested that we explain the documents in plain language so Diana, who is unfamiliar with legal and business terminology, can fully understand the transaction. Please ensure your presentation is clear and accessible.

Regarding the draft SPA, here are the key issues I’d like you to address:

Payment Arrangements: The draft SPA specifies that all payments will be made through the firm’s client account, with Diana providing the funds in cash. Consider whether this is a practical and secure arrangement.

Delay Between Signing and Completion: The agreement includes a gap between signing the SPA and completing the transaction. Analyze the risks posed by this delay and how they might be mitigated.

Non-Compete Clause: There is disagreement over the duration of the non-compete clause. Ensure that the clause is enforceable and adequately protects Michael’s investment.

Third-Party Contracts: The agreement does not adequately address how third-party contracts essential to MBL’s operations (e.g., leases, supply agreements) will be transferred. Review the risks and consider whether amendments are necessary.

Additionally, confirm whether the purchaser is Michael personally or PVL. This distinction may have significant legal and financial implications. Address the potential consequences of both scenarios in your analysis.

Thank you for your hard work on this matter. I know you had other plans this weekend—unfortunately, the timing of this transaction has been less than ideal. Apologies for the inconvenience.

Clara

Question:
Prepare a clear, structured response addressing each issue in detail, and include recommendations for amendments or clarifications to the draft SPA where necessary.