issues and trends in share capital

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  • Issues and trends in share capital

    By Catherine Gannon and Helen Curtis of Gannons Solicitors

    LexisNexis Confidential*

    Agenda1. Tax treatment of private companies and entrepreneurs

    2. Trending share types: it is all about growth!

    3. Trends for investors, employees and joint ventures

    4. Effect of tax on Shareholders Agreements design: prohibited matters, restrictive covenants etc.

    LexisNexis Confidential*

    By Catherine Gannon, CTA, SolicitorTax makes ordinary shares class(y)

    LexisNexis Confidential*

    Increasing tax pressures on successful entrepreneursSUSPECTName: Fred SmithAge: 55Occupation: entrepreneur and SME owner Salary: 150k Dividends: 100kOther: small property portfolioActivities: subscribed for shares @1, sells for 1m

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    LexisNexis Confidential*

    Increasing tax pressures on successful entrepreneurs

    SENTENCENo personal allowance because income over 120kAdditional rate taxpayer: income @ 45%Only 5k dividend allowance a yearHigh tax rate on dividends (38.1% in 2016)Entrepreneurs relief @10% but the lifetime limit might be decreasedInterest on buy to let no longer deductiblePressure to recruit and retain talentMaxed out pension

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    LexisNexis Confidential*

    Tax lessons for entrepreneurs All about capital growth! Focus on exit

    Use capital instead of income whenever possible to use 10% entrepreneurs relief

    Creative ideas emerging

    In the Summer 2015 budget the government announced that HMRC will be provided with additional resources to identify tax avoidance by wealthy individuals and trustees by requiring additional information from them so as to improve tax compliance.

    LexisNexis Confidential*

    Share classes that encourage growth Flowering shares

    Waterfall shares

    Freezer shares

    Shares for employees

    LexisNexis Confidential*

    Summary of why capital growth is attractive Capital assessed to CGT where the highest rate of tax is 28% and there is no NIIf you qualify for entrepreneurs' relief rate of CGT is 10% on gains of up to 10 million (lifetime allowance)Three basic rules

    5% of share capital (exception is EMI)Voting rightsEmployed/director for 12 months pre-sale

    LexisNexis Confidential*

    Freezing share rights drafting ideas1.1On a return of assets following a Liquidation or otherwise the surplus assets of the Company remaining after payment of all of its liabilities (Surplus Assets) shall be distributed pari passu between the holders of the A Ordinary Shares and the B Ordinary Shares (as if the same constituted one class of share, pro rata based on each holders respective holding). 1.2The C Ordinary Shares and D Ordinary Shares shall not give rise to a right to Surplus Assets upon Liquidation unless the Value before payment of all of the Companys liabilities is at or exceeds the Threshold. 1.3In the event that the C Ordinary Shares and the D Ordinary Shares do not give rise to a right to Surplus Assets there is a compulsory transfer.

    LexisNexis Confidential*

    Waterfall shares - draftingOn a return of assets or a sale the surplus assets of the Company remaining after payment of all its liabilities (Surplus Assets) shall be distributed in the following order of priority (a) First, but only where such Surplus Assets shall exceed 5,000,000, each holder of A Ordinary Shares shall be entitled to 25% of all such Surplus Assets for each A Ordinary share held by him, in preference to any amount paid to any holder of the Series B shares, Series C shares and Series D shares,(b) Second,(i) where Gross Proceeds shall exceed 10,000 only, each holder of A1 Ordinary Shares shall be entitled to 0.25% of all Surplus Assets for each A1 Ordinary Share held by him, and(ii) where Gross Proceeds shall exceed 20,000,000 only, each holder of A1 Ordinary Shares shall be entitled to a further 0.125% of all Surplus Assets for each A1 Ordinary share held by him(c) Third, or first in the event that such Surplus Assets shall not exceed 5,000,000, the holders of the X shares shall be entitled to be paid an amount equal to the Subscription Price for their X shares


    LexisNexis Confidential*

    Employee Share Schemes & Share OptionsAwarding equity to employees:

    Tax efficient (nil or 10% CGT)

    Improves business performance

    Improves employee motivation

    Competition already does it!

    LexisNexis Confidential*

    Employee Share Schemes & Share OptionsAwarding equity to employees:


    In 2013-14, the total value of shares and options awarded was around 3.45bn, 21% higher than in 2012-13.

    There were 4,000 total companies granting options or shares in schemes in 2013-14.

    The number of companies operating share schemes has continued to grow to 11,460 companies in 2013-14.

    LexisNexis Confidential*

    Impact on dividends New dividend tax allowance from April 2016 free 5,000 a year

    Expect big dividends before April 2016

    Structure dividend pay out >5,000 and work towards exit

    Sale or voluntary winding up HMRC will deny entrepreneurs' relief on cash balances in excess of trading requirements

    Dividend income which used to be grossed up by 10% for personal income tax calculations will be replaced with 5,000 dividend tax allowance from April 2016. The new 5,000 tax allowance will apply irrespective of the size of dividend, number of dividends in a year and irrespective of the amount of non-dividend income. It will also not reduce the total income for income tax purposes.

    Dividend tax rates will be as follows:7.5% for basic rate taxpayers32.5% for higher rate taxpayers38.1% for additional rate taxpayers

    Extract from the 2015 Summer Budget published 8 July 2015From April 2016 the government will remove the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of 5,000 a year for all taxpayers. This will ensure that ordinary investors with smaller portfolios and modest dividend income will see no change in their tax liability and some will pay less tax. Combined with the increases the government has made to the personal allowance and the introduction of the Personal Savings Allowance, from April 2016 individuals will be able to receive up to 17,000 of income per annum tax-free. The government will set the dividend tax rates at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. While these rates remain below the main rates of income tax, those who receive significant dividend income for example due to very large shareholdings (typically more than 140,000) or as a result of receiving significant dividends through a closed company will pay more. These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. The tax system will continue to encourage entrepreneurship and investment, including through lower rates of Corporation Tax.

    Disguised employment IR35 reform announced as one of the anti-avoidance measures in the budgetThe government will consult with stakeholders this year on how to improve the effectiveness of the intermediaries legislation (IR35) to protect against disguised employment.

    LexisNexis Confidential*

    By Helen Curtis, Solicitor

    Current Trends Main themes for investors

    LexisNexis Confidential*


    LexisNexis Confidential*

    Trends in Shareholders Agreement Investor trends

    Employee Shareholder trends

    Joint Venture trends

    LexisNexis Confidential*

    Investors SEIS/EIS

    Tax efficient but cannot be preference shares

    SEIS/EIS compliant

    Undertaking that the Company will remain SEIS or EIS compliant

    LexisNexis Confidential*

    Investors Reserved matters

    Shareholder threshold vs board representative

    Drag-along rights

    Risk of joint and several liability

    LexisNexis Confidential*

    Investors Employee Incentives

    Excluded from pre-emption protections

    LexisNexis Confidential*

    Investors Behaviour

    Information requirements Reporting requirements


    Share Purchase Agreement vs no warranties

    LexisNexis Confidential*

    Employees Good Leavers/Bad Leavers

    Incentive to stay Administrative burden if employees leave

    Pre-determined Fair Value

    Traditionally used external valuer Pre-agreed formula based on EBITDA

    LexisNexis Confidential*

    Employees Employment expert

    Barrister or Solicitor of x years experience

    Power of attorney

    To effect share transfer if employee absent

    LexisNexis Confidential*

    Employees Restrictive covenants

    Usually longer periods permissible than in Employment Agreements

    ESS shares

    Particular issues fo