A. Types of payments: auction (share) sale
i. Cash and completion accounts
i.i Who will receive consideration and what are their (Seller) tax consequences?
Bcs -> share sale Seller of Co will receive the consideration.
Seller = company disposing of a capital asset, it will prima facie make a chargeable gain upon which it must pay
corporation tax.
However -> Substantial Shareholdings Exemption (‘SSE’) is likely to be available & NO CT payable. Conditions:
1. Seller Co must have owned min 10% of the ordinary share capital of the co whose shares are being sold for at least 12
consecutive months in the 6 year period before disposal; and
2. Seller co must be a trading company/holding company of a trading group/subgroup throughout the period above until the da
of sale
NB: in ASSET SALE -> sale of business -> Seller Co will directly receive consideration + has to pay CT
SSE ONLY applies to SHARE SALE
i.ii What are completion accounts? How do they differ from a ‘locked box’ price mechanism?
Completion accounts [parties not sure of amt of consideration until after completion]
o ascertain precise net asset value (‘NAV’) of T on completion date
o purchase price adjustment mechanism -> only drawn up until after completion (info + financial records available)
o completion -> buyer will pay a purchase price based on an estimate of T’s NAV as at completion
o Once accounts finalised + NAV ascertained -> adjustment up or down
o Schedule in contract -> details re completion accounts (who/mechanisms/dispute/adjustment)
Locked box
o fixed purchase price
o valuation of T = based on a recent audited balance sheet o
o no mechanism for adjustment after completion
o benefits -> can be drafted to try to ensure that value does not ‘leak’ out of T btw exchange + completion
i.iii What is a pre-sale dividends in a share sale?
only relevant on a share sale
Purpose of T paying a pre-sale dividend:
o reduce its value/consideration the seller receives on sale
o reduces seller’s chargeable gain and its tax liability
Companies generally do not pay corporation tax on dividends received
o so Seller, as a corporate shareholder, could receive a pre-sale dividend tax-free
However -> If SSE is available: Seller = no tax liability on the consideration
o i.e Seller does not receive a tax advantage if Target pays it a pre-sale dividend (no point!)
NB: dividends can only be declared if there are sufficient distributable profits (s. 830 CA 2006) – check T’s b/ce sheet
ii. Payment in the form of shares: Commercial advantages
SHARES BUYER SELLER
ADV. B does not have to raise cash (vs. loan notes) S may benefit from dividend payments and/or capital growth
Lowers B’s gearing, making B more attractive to (NB: S will only be willing to accept shares that it can sell – i.e
future lenders/investors listed shares)
No legal obligation to pay dividends (unlike Tax deferral (below)
interest on loans)
DISADV. Dividend payments are not tax-deductible for B S does not receive cash (i.e reinvest in biz) ntil it realises its
(unlike interest) investment by selling the shares)
Procedure in share issue -> delays (SH res) Possible capital dep’n. If B becomes insolvent, S will receive
Dilutes shareholdings of B’s existing SHs who nothing for shares
may not pass the required resolutions No guarantee of dividends (SHs only entitled to a dividend if
one is declared)
Commercially: S would not be interested in holding ongoing
interest in biz it’s selling
iii. Payment in form of loan notes: Commercial considerations
i. Cash and completion accounts
i.i Who will receive consideration and what are their (Seller) tax consequences?
Bcs -> share sale Seller of Co will receive the consideration.
Seller = company disposing of a capital asset, it will prima facie make a chargeable gain upon which it must pay
corporation tax.
However -> Substantial Shareholdings Exemption (‘SSE’) is likely to be available & NO CT payable. Conditions:
1. Seller Co must have owned min 10% of the ordinary share capital of the co whose shares are being sold for at least 12
consecutive months in the 6 year period before disposal; and
2. Seller co must be a trading company/holding company of a trading group/subgroup throughout the period above until the da
of sale
NB: in ASSET SALE -> sale of business -> Seller Co will directly receive consideration + has to pay CT
SSE ONLY applies to SHARE SALE
i.ii What are completion accounts? How do they differ from a ‘locked box’ price mechanism?
Completion accounts [parties not sure of amt of consideration until after completion]
o ascertain precise net asset value (‘NAV’) of T on completion date
o purchase price adjustment mechanism -> only drawn up until after completion (info + financial records available)
o completion -> buyer will pay a purchase price based on an estimate of T’s NAV as at completion
o Once accounts finalised + NAV ascertained -> adjustment up or down
o Schedule in contract -> details re completion accounts (who/mechanisms/dispute/adjustment)
Locked box
o fixed purchase price
o valuation of T = based on a recent audited balance sheet o
o no mechanism for adjustment after completion
o benefits -> can be drafted to try to ensure that value does not ‘leak’ out of T btw exchange + completion
i.iii What is a pre-sale dividends in a share sale?
only relevant on a share sale
Purpose of T paying a pre-sale dividend:
o reduce its value/consideration the seller receives on sale
o reduces seller’s chargeable gain and its tax liability
Companies generally do not pay corporation tax on dividends received
o so Seller, as a corporate shareholder, could receive a pre-sale dividend tax-free
However -> If SSE is available: Seller = no tax liability on the consideration
o i.e Seller does not receive a tax advantage if Target pays it a pre-sale dividend (no point!)
NB: dividends can only be declared if there are sufficient distributable profits (s. 830 CA 2006) – check T’s b/ce sheet
ii. Payment in the form of shares: Commercial advantages
SHARES BUYER SELLER
ADV. B does not have to raise cash (vs. loan notes) S may benefit from dividend payments and/or capital growth
Lowers B’s gearing, making B more attractive to (NB: S will only be willing to accept shares that it can sell – i.e
future lenders/investors listed shares)
No legal obligation to pay dividends (unlike Tax deferral (below)
interest on loans)
DISADV. Dividend payments are not tax-deductible for B S does not receive cash (i.e reinvest in biz) ntil it realises its
(unlike interest) investment by selling the shares)
Procedure in share issue -> delays (SH res) Possible capital dep’n. If B becomes insolvent, S will receive
Dilutes shareholdings of B’s existing SHs who nothing for shares
may not pass the required resolutions No guarantee of dividends (SHs only entitled to a dividend if
one is declared)
Commercially: S would not be interested in holding ongoing
interest in biz it’s selling
iii. Payment in form of loan notes: Commercial considerations
