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It is tempting to view a corporate reorganisation, imposition of a holding company or demerger of two or more subsidiaries as internal and therefore not requiring “paperwork”. Directors are keen to make the document trail ‘lighter’. However it is a false economy to skip on the paperwork as you could be opening up claims from people like HMRC and shareholders.
To help you navigate the requirements involved with a corporate reorganisation we have explained the overview needed to prepare the step list. A solid step list if nothing else focuses the mind on the order of events and filings needed at Companies House and or HMRC.
Tax is usually a central factor in how reorganisations are structured. Seeking HMRC clearance can provide certainty that the proposed transaction will not generate unexpected stamp duty, income tax or capital gains tax liabilities. Depending on the type of reorganisation there may be more than one clearance application for the new structure. It is important to get the application letters right.
Dealing with applications and the step lists to support is a growing area of work for us as HMRC steps up surveillance. Our rate of successful HMRC clearance application is strong.
Board minutes easy to ignore and often wrongly regarded as ‘internal’. Various board minutes are required throughout the reorganisation process. It would be a mistake not to have the proper paper trail in place. If HMRC review, the first documents they call for are board minutes. In addition to business matters that the board is required to consider when implementing a reorganisation scheme it is also necessary to deal with conflict of interests and any interest that directors may have in the proposed transactions. Ignoring these matters can come back to haunt directors who could be facing claims against them in the future.
Similarly, shareholder approvals should not be ignored. Shareholder approvals are typically required in the context of variation of share class rights, substantial property transactions and in certain types of demergers approval of solvency statements and the reduction of capital. The articles, shareholders agreement or investment agreement may also set aside matters that require additional shareholder approval to that required under the Companies Act.
It is also important to get the timing of obtaining shareholder approvals right since they will be prerequisite for the execution of some steps.
Any reorganisation will involve various filing and reporting to Companies House and HMRC and it is essential to have all necessary forms prepared and filed on time. Companies could face penalties for late filing or reporting.
Reorganisations are typically complex and multi-stage transactions which require an understanding of a broad range of tax legislation. There can be many pitfalls and traps awaiting the inexperienced. Some examples include:
One of the steps in creating a new group structure/inserting a new holding is a share exchange agreement. Care should be taken when implementing the share for share exchanges to achieve tax neutrality. To achieve a tax neutral exchange it is essential that the shareholding in the new holding company mirrors the current shareholdings in target. Most practitioners will get the number or proportion of shareholding right but often in preparation for later stages will use different classes of shares and thereby fail to obtain stamp duty clearance for the transaction.
In capital reduction demergers it is an easy mistake to use the book value valuation for the share for share exchange. However, the number of shares issued in the new holding company should equal the market value of the assets in the new Holding Company. This is because when the Holding Company then reduces its capital, if the reduction is less than this market value (e.g. if it was reduced only by the book value), there is a distribution of the difference in value under S.1000(1)B CTA 2010, and no capital gains reliefs can apply to this distribution element.
Failure to obtain shareholder approval to variation of class rights or to any other proposed steps requiring shareholder consent could lead to minority shareholders challenging the transactions.
In our experience it is vital to have a checklist put together at the early stages of planning a reorganisation. A detailed step list of what is required to be done, when and by who could serve as a key tool to cover all intricacies.
A comprehensive step list should include details of the required documentation but also other steps such as filing of documents, transferring funds or consultations with employees.
For example, typical capital reduction demergers broadly involve the following stages:
With each stage requiring documentation varying from detailed board minutes and shareholders resolutions for each of the companies involved, intra group agreements for transferring assets, solvency statement and compliance statement, various Companies House forms, TUPE documents for employees, HMRC clearance application letters.
The step list should also provide the running order as normally in a reorganisation it will be necessary to execute certain steps before others.