Demergers and Management Buy Outs

1. Demergers and Management Buy Outs

2. Employee Incentives – approved plans All employee plans • Share incentive plans • SAYE Discretionary plans • Company Share Option Plans • Enterprise Management Incentives

3. Employee Incentives - unapproved plans • Share option plans • Share acquisition plans • Phantom plans

4. Employee incentives Employment related securities - ITEPA 2003 Part 7, Chapters 1-5 • Securities – widely defined • Available by reason of employment • Readily convertible assets – PAYE/NIC • Corporation tax deduction FA 2003, Sch 23 • Restricted securities

5. Employee Incentives Employee related securities Other considerations: • Accounting for share options – FRS20 • Company law requirements • Takeovers/demergers • Exit route generally

6. Employee incentives • Employee benefit trusts - act as a ‘warehouse’ for shares • Listed and AIM companies can now hold up to 10% of issued capital in treasury • Private companies must cancel shares purchased • Timing of deduction - ‘Dextra’

7. Structures - reconstructions Reconstructions “the transfer of a business or undertaking from one company to another, with the result that the same, or substantially the same, business or undertaking was being carried on after the transfer as before, and by the same, or substantially the same, persons” Mr Justice Berkley, Wilde v South African Supply & Cold Storage Co

8. Structure - demergers Demergers “A distribution by a company of subsidiaries to some or all of the members or a distribution by a company of trades or subsidiaries to one or more companies owned by some or all of the members of the distributing company”

9. Structure - Hive down • S343 ICTA 1988 – ownership before and after - losses and capital allowances • Capital gains – s171 TCGA 1992 • Stamp duty land tax Claw back if transferee leaves group within 3 years - watch pre 2002 goodwill

10. Structure – groups and divisionalisation Control Tests – 75% Groups Group reliefs for: • losses – Marks & Spencer • chargeable gains • Rollover relief • VAT • Stamp Duty • Stamp Duty Land Tax

11. Structure – groups and divisionalisation • Non resident companies as part of group – (ICI v Colmer) • Small companies marginal relief • Administration • Transfer pricing for UK

12. Structure – groups overseas matters Transfer pricing: • UK parent • Overseas company in low tax jurisdiction • Artificial sale/purchase price • Recalculation on an arm’s length basis • Watch limits – small/medium enterprises

13. Structure – groups overseas matter • Controlled Foreign Companies • Requirement to fall into CFC legislation: • Non residence • Control by UK resident • Imposition in its place of residence of a “lower level of taxation”

14. Structure- limited liability partnerships Generally transparent for tax Corporate form on winding up Treatment by offshore jurisdictions: • transparent or opaque? – Tax Bulletin December 2000

15. Structure - branch or subsidiary • Commercial, legal & taxation implications • Loss or profits in the branch incorporated into parent’s results • Local trade preferences • Permanent establishment • Filing requirements overseas • Group relief position restricted for branches • Double tax relief and double tax treaties

16. Structure - franchises Advantages and disadvantages for both franchisee and franchisor. Watch treatment of • royalties • Initial payments • goodwill • on-going fees Tax Bulletin June 1995

17. Management Buy Out • Sell assets or shares? • Position of vendor – separate legal entity and liability history • Due diligence • Financing – assistance • Employee share issues - BVCA memorandum of understanding

18. MERGER & DEMERGER Introduction Merger – Tool for consolidation Demerger – A tool to facilitate Merger

19. INTRODUCTION • In the Corporate world, merger and demerger have become universal practices for securing survival, growth, expansion and globalisation of enterprise and achieving multitude objectives. • Merger is the fusion of two or more existing companies. • On the other hand, demerger signifies a movement in the company just opposite to merger. • To incorporate the spirit of Corporate World and to imbibe the consultation creed, probably the Council of ICAI used the term `merger’ and `demerger’ of C.A. Firms.

20. MERGER – TOOL FOR CONSOLIDATION • In order to have an orderly and sustainable growth of CA Firms, it is desirable that the coming together of the firms begins with networking and then matures to mergers. Networking will enable the firms to develop working relationships with each other. Once the firms have developed sufficient confidence in each other then they can venture into a marriage which is the form of mergers. However, it is not to suggest that there cannot be mergers without networking.

21. Merger Agreement has to be filed with the Institute within 30 days from the date of Agreement. • The Reconstitution Agreement/Partnership Deed shall be filed with the Registrar of Firms. • After the merger of the firms, the Institute will freeze the names of the merging firm and shall not allot the same names to any other firm.

22. The mergers should be effected to develop core competencies and to render professional services of a larger range spread over bigger geographical area. A merged big entity will always be superior to a network arrangement. A network of such bigger entities will lead to formation of bigger firms in near future.

23. DEMERGER–A TOOL TO FACILITATE MERGER • The advantage of a formal merger is the ability to demerge which will be formally recognised by the Institute. One of the impediments for the growth of the firms is that once a merger takes place there is no exit route. The merged entity looses its trade name and also its seniority forever. There is always a lurking feat that the pre-merger cordial relations may not continue after the merger. In the event of such fear coming true then the merging firm will be in a situation of having lost everything that it had before merger.

24. It is the fear that acts as a barrier in the process of merger of firms. • The merger had to precede the demerger. Demerger cannot be used as a hanging sword on the merged entity. Therefore to balance out between the two opposite issues i.e., (a) the need to demerge and (b) the probable misuse of this right to demerge, it is prescribed that the demerger in the manner can be demanded only within a period of 5 years from the date of merger. • The clear rules of demerger will facilitate the merger.

25. In case of 75% or more of the continuing partners of one of the erstwhile merging firm have demerged after giving due notice to the other partners, then in such case, the merger shall come to an end and if the remaining erstwhile merging firms/partners of the erstwhile merged firm decided to continue, then they should enter into a fresh Merger/Partnership Agreement.

26. The Merger Agreement shall contain the terms and conditions for Demerger. • The Merger Agreement shall stipulate that incase 75% or more of the continuing partners of one of the erstwhile firms are willing to demerge, then they may do so after giving due notice to other partners & to the Institute. • The demerged firm will entitled to practice in its old trade name.