Post on 13-Apr-2017
Issues and trends in share capitalBy Catherine Gannon and Helen Curtis of Gannons Solicitors
LexisNexis® Confidential 2
Agenda
1. 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 3
By Catherine Gannon, CTA, Solicitor
Tax makes ordinary shares class(y)
LexisNexis® Confidential 4
Increasing tax pressures on successful entrepreneurs
SUSPECTName: Fred SmithAge: 55Occupation: entrepreneur and SME owner Salary: £150k Dividends: £100kOther: small property portfolioActivities: subscribed for shares @£1, sells for £1m
LexisNexis® Confidential 5
Increasing tax pressures on successful entrepreneurs
SENTENCE•No personal allowance because income over £120k•Additional rate taxpayer: income @ 45%•Only £5k dividend allowance a year•High tax rate on dividends (38.1% in 2016)•Entrepreneur’s relief @10% but the lifetime limit might be decreased•Interest on buy to let no longer deductible•Pressure to recruit and retain talent•Maxed out pension
LexisNexis® Confidential 6
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
LexisNexis® Confidential 7
Share classes that encourage growth
Flowering shares
Waterfall shares
Freezer shares
Shares for employees
LexisNexis® Confidential 8
Summary of why capital growth is attractive
• Capital assessed to CGT where the highest rate of tax is 28% and there is no NI• If 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 rights• Employed/director for 12 months pre-sale
LexisNexis® Confidential 9
Freezing share rights – drafting ideas
1.1 On 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 holder’s respective holding). 1.2 The 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 Company’s liabilities is at or exceeds the Threshold. 1.3 In 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 10
Waterfall shares - drafting
On 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
etc
LexisNexis® Confidential 11
Employee Share Schemes & Share Options
Awarding equity to employees:
•Tax efficient (nil or 10% CGT)
•Improves business performance
•Improves employee motivation
•Competition already does it!
LexisNexis® Confidential 12
Employee Share Schemes & Share Options
Awarding equity to employees:
Statistics:
•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 13
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
LexisNexis® Confidential 14
By Helen Curtis, Solicitor
Current Trends – Main themes for investors
LexisNexis® Confidential 15
Introduction
LexisNexis® Confidential 16
Trends in Shareholder’s Agreement
• Investor trends
• Employee Shareholder trends
• Joint Venture trends
LexisNexis® Confidential 17
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 18
Investors
• Reserved matters Shareholder threshold vs board representative
• Drag-along rights Risk of joint and several liability
LexisNexis® Confidential 19
Investors
• Employee Incentives Excluded from pre-emption protections
LexisNexis® Confidential 20
Investors
• Behaviour Information requirements Reporting requirements
• Warranties Share Purchase Agreement vs no warranties
LexisNexis® Confidential 21
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 22
Employees
• Employment expert Barrister or Solicitor of x years experience
• Power of attorney To effect share transfer if employee absent
LexisNexis® Confidential 23
Employees
• Restrictive covenants Usually longer periods permissible than in Employment Agreements
• ESS shares Particular issues for the new Employee Shareholder status
LexisNexis® Confidential 24
Joint Venture
• Mediation Provisions Position without Shareholders’ Agreement Alternatives to mediation
• Privileged Relations More extensive definitions to include new family structures
LexisNexis® Confidential 25
Thank you!