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: tom.hall@pannone.co.uk

Simon Moulden

Tel: 0161 909 4192

Email: simon.moulden@pannone.co.uk

www.pannone.com