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Tom Hall Simon Moulden Senior Associate Head of Corporate Tax Corporate Group Corporate Group
Shareholder Issues
9 July 2013
www.pannone.com
Content
• Part 1: Bringing in a new shareholder.
• Part 2: Buying out an existing shareholder.
• Part 3: Case studies and questions.
Part 1: Bringing in new shareholders
• Take legal advice!
• Why bring in a new shareholder?
– Investment: need for working / development capital. Better than a bank?! – Part of an overall remuneration package for new Director – Incentivise or reward ’shining stars’ – Enables the existing shareholders to realise value
• Should you transfer or issue the shares? Where do you want the money to go? What about dilution?
• Should you grant options or give shares?
Part 1: Bringing in shareholders
Shares or Options
• Basic choice: Shares or Options/Warrants • Legal Differences
– Voting rights – Dividend entitlement – Cessation of employment
• Tax Differences – Timing of tax and future capital growth – Entrepreneurs relief – Bonus payments vs. Dividends
• Specific Schemes – Enterprise Management Incentive – Employee Shareholders – Enterprise Investment Scheme
Part 1: Bringing in shareholders
Types of Option
• Three types of share options: – Enterprise Management Incentive (EMI) – Company Share Option Plan (CSOP) – Unapproved Option
• The Company will grant an “Option” usually under a set of scheme rules to selected employees
• The Option will allow the holder to purchase a number of shares at a set “Exercise Price” when an “Exit Event” occurs, provided any “Performance Conditions” are met
• An “Exit Event” is typically either the Listing of the Company on a recognised stock exchange or the sale of the Company
• The Performance Conditions can relate to the Company, division or individual as measured at the Exit Event or over a period of time
Part 1: Bringing in shareholders
Employee Shareholders
• Employee Shareholders (Finance Act 2013)
• Troubled implementation
• Employment Rights or Capital Gains Tax?
• Income Tax
• Good leaver / Bad Leaver
Part 1: Bringing in shareholders
Shareholder Protection
• What protections should the company and the existing shareholders seek: – Deed of Adherence to shareholders’ agreement (if any)? – Restrictions on transfer of shares? – Good/bad leaver provisions (particularly if the new shareholder is an
employee)? – Tie in service / employment contracts? – Drag along rights? – Restrictive covenants? – Confidential information? – Information obligations? – All of the above?
Part 1: Bringing in shareholders
Tax Implications
• 3 scenarios considered
• Employee with an Enterprise Management Incentive (EMI) option
• Non-executive with an unapproved option
• Investor with Enterprise Investment Scheme (EIS) Relief
Part 1: Bringing in shareholders
EMI Option
• No tax will be payable by the Optionholder on grant of the Option
• No tax should be payable on the exercise of the Option • When the Optionholder sells the shares, any profit made may
be subject to capital gains tax • When the shares are sold, the rate of capital gains tax will be
between 28% - 10% • Entrepreneurs Relief • Current capital gains tax annual exemption is £10,900
Part 1: Bringing in shareholders
Unapproved Option
• No tax will be payable by the Optionholder on grant of the Option
• Tax usually payable on the exercise of the Option at marginal rate of income tax (45%) plus NIC
• When the Optionholder sells the shares, usually no capital gains tax
Part 1: Bringing in shareholders
Enterprise Investment Scheme
• Income Tax Liability of investor reduced by 30% of EIS investment
• Subject to a maximum investment of £1 million • No CGT on a disposal • Any loss realised on a disposal set off against either income or
chargeable gains • CGT on the disposal of another asset can be deferred
indefinitely by reinvesting proceeds in EIS eligible shares • Stringent conditions apply for up to 3 years
Part 2: Buying out shareholders
• Take legal advice! • Who will buy the shares?
– The existing shareholders? – A new shareholder or incoming Director? – An Employee Benefit Trust? – Newco holding company and share for share
exchange for remaining shareholders – The Company by way of share buyback?
Part 2: Buying out shareholders
Share Buy-Backs
• Companies Act 2006 requirements
• Company must have distributable profits
• Payment must be made on the day of Completion so no deferred consideration
Part 2: Buying out shareholders
What price?
• What price do we pay for the leaver’s shares? – Check your shareholders’ agreement and/or articles!
– In the case of disagreement, seek independent valuation.
– Basis of valuation: should they take into account whether it is a minority or majority interest, or the rights attaching to the shares?
– Repayment of shareholder loans?
Part 2: Buying out shareholders
Terms
• What protections should the company and the other shareholders seek?
• Waiver of all claims? • Warranties and indemnities? • Restrictive covenants to protect the goodwill? • Confidentiality? • All of the above? Does it depend on who is leaving?
Part 2: Buying out shareholders
Tax Considerations
• What are the tax implications for the company and the new party?
• Should there be a tax covenant? • Universal sale or discreet sale • Market Valuation / Basis of Valuation • Restricted Securities • Tax treatment of Buy-Back • Newco route and Anti-Avoidance legislation
Part 2: Buying out shareholders
Troubleshooting
• If in doubt, what does your shareholders’ agreement and/or articles say?
• Deadlock provisions
• Mediation
• Demergers
• If all else fails, apply to the court for a just and equitable winding up
Case Studies
Keep Me Rich Co. Limited
Majority owner of a valuable private family company, Keep Me Rich Co. Limited, is thinking about giving shares to an employee • Seek advice! • Consider whole remuneration package • Consider the tax consequences
– Immediate tax consequences – Tax consequences on exit
Keep Me Rich Co. Limited
• Consider share option schemes • If shares are to be given, think about:
– Voting rights? Dividend rights? Rights to sale proceeds only? – Leaver provisions – Prohibition on transfer/charging – Drag along rights – Restrictive covenants
• Service contract containing circumstances for dismissal
Questions?
Tom Hall
Tel: 0161 909 4008
Email: [email protected]
Simon Moulden
Tel: 0161 909 4192
Email: [email protected]
www.pannone.com
