Private Acquisitions SGS 2
Preparation:
A – Tax and Group Structures Workbook
1. Paragraphs 1.7 and 2.4 Section 1
1.7: Tax consequences for a company leaving a group; exit charge
company changing hands may have tax implications for the seller if the target is a
member of a group and will hence be leaving that group as a result of the sale.
When a company, which has received a chargeable asset as a result of an intra
group transfer, leaves a group within 6 yrs of the receipt of that asset, a charge may
arise under s.179 TCGA. This is called an ‘exit’ or a de-grouping’ charge.
2.4: SDLT claw back
® Issue that the buyer of a target company should look out for when carrying
out tax due diligence = possibility that a claw back of SDLT will be triggered
by the share sale.
® Can arise where the target company received land as a result of an intra-
group transfer and it leaves the group within 3 years of the receipt of that
land/transfer.
® The target company here on a share sale may be leaving the seller’s group
on completion.
2. Para 2.1 and 3.3 Section 2
2.1: Parental liability
Most common ways for a parent to assume liability in respect of its subsidiaries under
contract = means of a guarantee.
Guarantees and cross guarantees?
® A guarantee from a parent company is often required where the business
and assets of a subsidiary are not considered to be substantial enough on
their own to be sure that the subsidiary will be able to perform its obligations
under a contract.
® Context of an acquisition? A subsidiary selling its business = buyer may request
that the selling company’s parent company joins in to guarantee the
subsidiary’s performance under the warranties and indemnities in the
agreement.
® Newly formed company = buyer, seller may request that the buyer’s parent
company guarantees its liabilities in respect of the purchase price especially if
there is any deferred consideration.
® Cross guarantee = companies in a group being called upon to guarantee the
obligations of each other. Context of a share sale, the parties to a cross-
guarantee will have continuing liabilities AFTER completion for these
obligations which they have guaranteed, unless they are able to negotiate a
release. Usually unlikely to get a release unless a new guarantor of equivalent
financial status steps into their shoes.
,Comfort letters?
® If a parent company is in a strong bargaining position it might refuse to give a
guarantee and would give a comfort letter instead.
® This is not legally binding = merely an acknowledgement of the subsidiary’s
obligations and may include a statement that it is the present policy of the
parent company to ensure the subsidiary is managed so it maintains
adequate financial resources
® Moral but not legal force
Directors’ duties and group status – intra group transfers at an undervalue
® Particularly relevant for private company acquisitions.
® Re-organisation? Assets being transferred from a target company to its parent
company or one within the same corporate group.
® During a re-organisation, assets may be transferred at an undervalue in order
to strip some value out of the transferring company.
Here, a number of issues can arise;
1. The directors of the transferring company need to be aware of their statutory
duties
Provided that the transferring company is solvent and has sufficient distributable
profits to cover the amount of the undervalue = no difficulty for directors’ duties if the
transfer at an undervalue is ratified by the SH.
If the company = insolvent, this may be a transaction at an undervalue under s.238
IA (look at BLP if needed)
Position of ratification?
• Before the CA 2006, Rolled Steel Products (Holdings) Ltd v British Steel
Corporation = a breach of fiduciary duty can be ratified by informal
unanimous agreement of the company’s shareholders provided the
transaction concerned is technically within the powers of the company and it
is not a fraud on the creditors.
• S.239 CA: SH are able to ratify a breach of directors’ duties (i.e negligence,
default, breach of duty and trust) by ordinary resolution.
• BUT: under s.239(4) CA 2006 = the votes of those personally interested =
disregarded.
• Articles of association can also increase the threshold required for ratification
and members can still ratify acts of directors via unanimous consent
(s.239(6)(a)).
2. The statutory restrictions in CA 2006 on distributions must also be considered
What is a distribution?
• S.829 CA 2006
o Distribution means every description of distribution of a company’s
assets to its members, whether in cash or otherwise.
, • S.830 CA 2006
o A company shall not make a distribution except out of profits available
for the purpose.
• As well as cash dividends, there are 3 other types of non cash dividends that
may arise in an intra-group transfer:
o Company gifts an asset (distribution equal to the value of the asset)
o Company transfers a property to its shareholder at an undervalue (this
will be distribution of an amount equal to the undervalue).
o Asset transferred between subsidiaries (Aveling Barford v Perion) =
accepted that where a subsidiary transfers an asset either as a gift /
undervalue to a sister subsidiary (i.e same parent company) this
transfer = deemed distribution in kind to the parent.
In each case the transferring company will be making a distribution and under
s.830(1) CA must have sufficient profits available to cover the value of the
distribution.
Determining whether a distribution is lawful:
1/ is there a distribution? Ex, an asset transferred for the market value = not a
distribution, no undervalue
2/ for it to be lawful, the company making the distribution must have some positive
distributable profits. If none = the distribution will be illegal
3/ if they do have positive distributable profits, last bit is to make sure that they are
sufficient to cover the distribution.
Consequences of an illegal distribution?
• An illegal distribution cannot be ratified by the shareholders (s.239(7))
• Consequences for both the directors authorising it and the SH receiving it.
Re National Funds Assurance Co = the directors who authorised the distribution will
be liable jointly and severally, to repay the company.
If the SH receiving the distribution knew or had reasonable grounds for believing that
the distribution was being paid in contravention of s.830CA 2006, the SH will be liable
to repay that part of the distribution paid. S.847 CA
Consequences of an illegal deemed distribution
Statute doesn’t confirm but in practice, it is accepted that deemed distributions are
governed by the statutory rules on distributions under CA 2006.
Aveling Barford = if the deemed distribution or part of it is unlawful and the recipient
acquired it with knowledge of all facts, then the recipient = constructive trustee of
the benefit it has received from the transaction. They could therefore be liable to
return the benefit to the transferor.
B – look at activity 1 solution from SGS 19 BLP (desktop)
C – Ch1 and 2
® Para 8 Ch 1
o Preliminary stages
Preparation:
A – Tax and Group Structures Workbook
1. Paragraphs 1.7 and 2.4 Section 1
1.7: Tax consequences for a company leaving a group; exit charge
company changing hands may have tax implications for the seller if the target is a
member of a group and will hence be leaving that group as a result of the sale.
When a company, which has received a chargeable asset as a result of an intra
group transfer, leaves a group within 6 yrs of the receipt of that asset, a charge may
arise under s.179 TCGA. This is called an ‘exit’ or a de-grouping’ charge.
2.4: SDLT claw back
® Issue that the buyer of a target company should look out for when carrying
out tax due diligence = possibility that a claw back of SDLT will be triggered
by the share sale.
® Can arise where the target company received land as a result of an intra-
group transfer and it leaves the group within 3 years of the receipt of that
land/transfer.
® The target company here on a share sale may be leaving the seller’s group
on completion.
2. Para 2.1 and 3.3 Section 2
2.1: Parental liability
Most common ways for a parent to assume liability in respect of its subsidiaries under
contract = means of a guarantee.
Guarantees and cross guarantees?
® A guarantee from a parent company is often required where the business
and assets of a subsidiary are not considered to be substantial enough on
their own to be sure that the subsidiary will be able to perform its obligations
under a contract.
® Context of an acquisition? A subsidiary selling its business = buyer may request
that the selling company’s parent company joins in to guarantee the
subsidiary’s performance under the warranties and indemnities in the
agreement.
® Newly formed company = buyer, seller may request that the buyer’s parent
company guarantees its liabilities in respect of the purchase price especially if
there is any deferred consideration.
® Cross guarantee = companies in a group being called upon to guarantee the
obligations of each other. Context of a share sale, the parties to a cross-
guarantee will have continuing liabilities AFTER completion for these
obligations which they have guaranteed, unless they are able to negotiate a
release. Usually unlikely to get a release unless a new guarantor of equivalent
financial status steps into their shoes.
,Comfort letters?
® If a parent company is in a strong bargaining position it might refuse to give a
guarantee and would give a comfort letter instead.
® This is not legally binding = merely an acknowledgement of the subsidiary’s
obligations and may include a statement that it is the present policy of the
parent company to ensure the subsidiary is managed so it maintains
adequate financial resources
® Moral but not legal force
Directors’ duties and group status – intra group transfers at an undervalue
® Particularly relevant for private company acquisitions.
® Re-organisation? Assets being transferred from a target company to its parent
company or one within the same corporate group.
® During a re-organisation, assets may be transferred at an undervalue in order
to strip some value out of the transferring company.
Here, a number of issues can arise;
1. The directors of the transferring company need to be aware of their statutory
duties
Provided that the transferring company is solvent and has sufficient distributable
profits to cover the amount of the undervalue = no difficulty for directors’ duties if the
transfer at an undervalue is ratified by the SH.
If the company = insolvent, this may be a transaction at an undervalue under s.238
IA (look at BLP if needed)
Position of ratification?
• Before the CA 2006, Rolled Steel Products (Holdings) Ltd v British Steel
Corporation = a breach of fiduciary duty can be ratified by informal
unanimous agreement of the company’s shareholders provided the
transaction concerned is technically within the powers of the company and it
is not a fraud on the creditors.
• S.239 CA: SH are able to ratify a breach of directors’ duties (i.e negligence,
default, breach of duty and trust) by ordinary resolution.
• BUT: under s.239(4) CA 2006 = the votes of those personally interested =
disregarded.
• Articles of association can also increase the threshold required for ratification
and members can still ratify acts of directors via unanimous consent
(s.239(6)(a)).
2. The statutory restrictions in CA 2006 on distributions must also be considered
What is a distribution?
• S.829 CA 2006
o Distribution means every description of distribution of a company’s
assets to its members, whether in cash or otherwise.
, • S.830 CA 2006
o A company shall not make a distribution except out of profits available
for the purpose.
• As well as cash dividends, there are 3 other types of non cash dividends that
may arise in an intra-group transfer:
o Company gifts an asset (distribution equal to the value of the asset)
o Company transfers a property to its shareholder at an undervalue (this
will be distribution of an amount equal to the undervalue).
o Asset transferred between subsidiaries (Aveling Barford v Perion) =
accepted that where a subsidiary transfers an asset either as a gift /
undervalue to a sister subsidiary (i.e same parent company) this
transfer = deemed distribution in kind to the parent.
In each case the transferring company will be making a distribution and under
s.830(1) CA must have sufficient profits available to cover the value of the
distribution.
Determining whether a distribution is lawful:
1/ is there a distribution? Ex, an asset transferred for the market value = not a
distribution, no undervalue
2/ for it to be lawful, the company making the distribution must have some positive
distributable profits. If none = the distribution will be illegal
3/ if they do have positive distributable profits, last bit is to make sure that they are
sufficient to cover the distribution.
Consequences of an illegal distribution?
• An illegal distribution cannot be ratified by the shareholders (s.239(7))
• Consequences for both the directors authorising it and the SH receiving it.
Re National Funds Assurance Co = the directors who authorised the distribution will
be liable jointly and severally, to repay the company.
If the SH receiving the distribution knew or had reasonable grounds for believing that
the distribution was being paid in contravention of s.830CA 2006, the SH will be liable
to repay that part of the distribution paid. S.847 CA
Consequences of an illegal deemed distribution
Statute doesn’t confirm but in practice, it is accepted that deemed distributions are
governed by the statutory rules on distributions under CA 2006.
Aveling Barford = if the deemed distribution or part of it is unlawful and the recipient
acquired it with knowledge of all facts, then the recipient = constructive trustee of
the benefit it has received from the transaction. They could therefore be liable to
return the benefit to the transferor.
B – look at activity 1 solution from SGS 19 BLP (desktop)
C – Ch1 and 2
® Para 8 Ch 1
o Preliminary stages
