One of my accountancy firm clients had a company client, one of whose director-shareholders wanted to take over part of the company’s business, following which he intended for that business to be taken over by a third party of which he would become a director and shareholder. The strategy involved interposing a holding company on top of the trading company, which then declared a dividend in specie of property which was to be retained by ‘Holdco’. The shares in Holdco were then reorganised into A and B shares and the shares in ‘Tradeco’ were allocated to the A shares and the property to the B shares. When Holdco issued its shares to the shareholders of Tradeco in exchange for their shares in Tradeco it accounted for the Tradco shares at ‘fair value’. The A shareholder then formed ‘Newco’, Holdco transferred the shares in Tradeco to Newco by way of reduction of capital and Newco issued shares to the director. He then entered into the further reconstruction with the third party involving the exchange of shares in Newco in exchange for shares in the third party.
Needless to say the whole transaction was complex and the above is only a summary. I advised the accountants on the tax aspects of the various steps involved and assisted in drafting applications to HMRC for statutory clearances for both reconstructions, which were successful. HMRC recently changed the anti-avoidance ‘transactions in securities’ to include a capital reduction as potentially subject to counteraction notices i.e. to cancel any tax advantage, but commercial transactions are not usually challenged. Had cash extraction for the shareholders been part of the deal the outcome might have been different but no money changed hands.
