Shoosmiths finds solution two taxing situation

Shoosmiths finds solution two taxing situation

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Author: Niall Murphy & Tom Wilde

The Shoosmiths tax team was instructed by a corporate client with two very distinctive businesses - one held in a holding company and the other in a subsidiary. The client also had two very different workforces working for each business.

The client had granted share options to the various employees, but was concerned that the options may have been triggered unfairly because one business was likely to do well, and the other would not.

What issue or challenge did this company face and what was their goal?
The businesses were developing at different rates. The shareholders therefore anticipated that they may receive an offer for the acquisition of the main business, but not for the subsidiary. As any buyer would have been unlikely to want to acquire the subsidiary, the client would have been left with the problem of having to remove the subsidiary prior to sale, which could have given rise to tax issues.

What role did we play in helping the client achieve this goal? What obstacles did we have to overcome? What was the client's view of our support?
The Shoosmiths' team decided that the best way to alleviate this situation for the client was to carry out a demerger using the provisions of section 110 Insolvency Act 1986.

What approach did we take and was there anything exceptional or unusual to note?
The demerger was implemented by putting a new holding company over the existing holding company, transferring the shares of the subsidiary up to the new company, and then placing the new company into liquidation.

The shares in the original holding company were then transferred to a second new holding company, and the shares in the subsidiary, to a third new holding company. Simultaneously, the original share options were cancelled and new share options were issued in the two new groups so as to better align the employees' interests with those of the company for which they worked.

What was the end result for the client and how did the benefit?
As tax clearances were obtained, there was no tax charge on the reorganisation apart from a small amount of stamp duty. The shareholders were left satisfied with this solution as they now had two legally distinct businesses, free to develop at their own rate and no longer impacting on the business decisions taken by one another.