Sale of Minority Shareholding - dealing with the intangibles

Sale of Minority Shareholding - dealing with...

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It has been proposed that I (and a fellow minority shareholder - both above 5%) sell our shares in a Company to the majority shareholder. The payment we will receive will reflect the "cash in the bank", which we've been told should be eligible for Entrepreneurs Relief, However, the Company also has a number of "live" collaboration agreements which could (although the chances are small as we are talking about drug development projects, which have a high failure rate) result in future payments to the Company. The Company also has a small shareholding (much less than 5%) in another young biotech company.

The question is, how should we (the minority shareholders) best preserve our interest in any future potential payments arising from the agreements/shares without facing a large tax bill, now or in the future? We do not want to lose or sell these much more intangible assets, which the majority shareholder has agreed to. It has suggested having individual side agreements with each of us, to disperse any future income from the agreements/shares. Or is there a more tax efficient way of doing this?

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By micalijo
23rd Oct 2012 14:40

The value of the collaboration agreements and investments should in theiry be reflected in the price paid for the shares.

I realise it may cause trouble but you don't have to accept the proposal as it stands.

If I were the majorty shareholder I would be reluctant to offer you anymore than some kind of bonus scheme attaching to any future income from the collaborations.  I assume you are essential part of the team so in his/her interest to keep you happy?

Perhaps you could suggest a share scheme in case one of these things take off - although it seems the owner doesn't want minority shareholders involved.

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By JamesPrice
23rd Oct 2012 15:02

Do the deal

I would think it ought to be possible to structure a deal whereby you get an enhancement to your consideration should these projects take off. Tax, as you observe, is really the problem. A deal along these lines generates unascertainable deferred consideration. I believe you can have the right to those future payments valued and treated as being part of the sale proceeds so that it qualifies for Entrepreneur's Relief, but that will still give a 10% tax charge on proceeds you haven't received. Perhaps one more versed in the dark arts of CGT than I can confirm my thinking, or not.

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By Biotech Guy
24th Oct 2012 07:32

WANTED: Someone "versed in the dark arts of CGT!"

Firstly, thank you both for responding to my query. The majority shareholder is happy for the both of us (minority shareholders) to share in any future upside from the agreements and shares relative to our minority shareholding. The thing is, how best to structure a deal so that should we receive (possibly 3-6 years down the line) any deferred consideration, we minimise our tax liability - particularly upfront.

Obviously, I'm particularly interested in James' comments and so wondered if  there is a CGT guru out there who could confirm his thinking, or not.

Thanks again for all your help.

 

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By riksti
24th Oct 2012 08:39

Agree with James

The deferred consideration will be valued at the point of the sale of shares and added to the cash proceeds. This total will qualify for entrepreneurs' relief provided you own at least 5% of the shares and are an employee of the company and have done both for at least 12 months prior to the date of sale.

You can either pay CGT on this total upfront or "roll forward" the proportion of the gain relating to the deferred consideration. But if you roll it forward (i.e. don't pay CGT until you have the money, if any, from deferred consideration) you won't get entrepreneurs' relief on this gain. So, overall... if you're eligible for ER it's cheaper to pay it all outright, however you have to pay tax on amounts you haven't yet received.

Also...

If you eventually receive more than what you estimated in the beginning you will have to pay CGT on this difference (and it won't qualify for ER)

If you receive less then you will have a capital loss.

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Replying to neiltonks:
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By blok
24th Oct 2012 09:09

.

riksti wrote:

 But if you roll it forward (i.e. don't pay CGT until you have the money, if any, from deferred consideration) you won't get entrepreneurs' relief on this gain. So, overall... if you're eligible for ER it's cheaper to pay it all outright, however you have to pay tax on amounts you haven't yet received.

Question - How is he able to roll forward the gain on the unascertainable amount, if the paper for paper provisions are not met?

 

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By riksti
24th Oct 2012 09:19

blok - good point

I was imagining facts that actually weren't in the OP. Sorry!

So simplified situation:

1) value deferred consideration

2) calculate CGT and pay it

3) if you receive any consideration in the future there may be a further gain or loss for you to deal with.

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By Biotech Guy
25th Oct 2012 09:38

OK, you've just lost me - paper for paper provision?

(I think) I understand the concept of an exchange of assets for shares (which is basically what happened), but don't I understand the significance of the "provision" element.- or even what it means! 

FYI: The unquoted shares represent well below 5% of the total shareholding in the "young biotech" and neither companies are family businesses. Whereas, our minority shareholdings in the Company are each above 5%. 

Anyway, if I understand you both correctly, the deferred consideration has to be ascertainable (ie a value assigned to it) if we are to  benefit from Entrepreneurs Relief. But if it is unascertainable, then we cannot benefit from ER when/if they are eventually sold for a cash, And the same is true for the potential future rights embodied in the collaboration agreements mentioned above.

If that is correct, and we pay the CGT (at the ER rate) upfront on the value (presumably agreed with HMRC) of the deferred consideration, why would there be any "further gain or loss" to deal with? Thanks again to everyone for all your help and advice.

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