There is a proposal to form a NewCo to take over a UK and two foreign companies by issuing shares.
This arrangement would be commercially driven and not to avoid tax.
Can the NewCo shares be issued in any proportion to secure s.135 'rollover' relief?
Looking at the legislation reference is made under s.135(3) that sections 127 to 131 (share reorganisations, etc.)apply ... and the exchange is a reorganisation of share capital. Does this mean that that provided, for example, NewCo holds more than 25% of the ordinary share capital of the target company, the share exchange would deemed to be a reorganisation without worrying what this means by reference to s.126 (requiring the new shares to be issued in proportion to the old)?
Also, in the event that the value of the NewCo shares for the UK shareholders are worth less than the shares exchanged does this present a value shifting problem?
Daren Peacock
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Replies (5)
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I can still see that I might be wrong but...
...section 135(3) requires 'any necessary adaptations' to be made to sections 127 to 131 where the transaction is an exchange rather than a reorganisation.
Section 127 will then read:'Subject to ... an exchange shall not be treated as involving any disposal...'
But what is an exchange? Without a definition how can s127 proceed?
That impasse can only be resolved by importing the s126(2) definition of reorganisaton adapted to the case of exchanges.
So we get:'....the exchange of two companies' share capitals includes:- any case where persons are ......allotted shares in the second company... in respect of and in proportion to ... their holdings ... in the first company.'
The subjunctive or contrary to fact sense of s135 is that the reliefs in s127 - 131 apply to exchanges in the same circumstances as they apply to reorganisations. One of those circumstances is that the transaction (whether reorganisation or exchange)must be 'in repsect of and in proportion to'.
Considered purposively, the question would be: why would the legislation provide relief for exchanges that are not 'in repsect of and in proportion to' when it does not provide relief for reorganisations that are not so?
The anti-avoidance purpose of restricting relief to only those reorganisations that are 'in respect of and in proportion to' applies equally to exchanges. That is another reason for interpreting s135 as applying only to exchanges that are 'in respect of and in proportion to'.
Don't quite follow you Darren
The words "as if" in s135(3) do mean that one does not need to look at s126 to determine whether there is a reorganisation, but, there is no deemed disposal because s127 says that "...a reorganisation [which we are deemed to have] shall not be treated as involving any disposal of the original shares..."
An interesting question
But s135 does not actually deem an exchange to be a reorganisation.
Rather, it is saying that, even though an exchange is not a reorganisation, nonetheless, the reliefs in s 127 - 131 will apply to an exchange as they would do to a reorganisation.
Thus the s126 definition of reorganisation still applies so that the exchange has to be 'in respect of and in proportion
to' the original holding.
As the questioner suggests, without this condition, there would be the opportunity for illicit value shifting.
An interesting answer, john
but not the right one I think.
What s135(3) says is "Where this section applies, sections 127 to 131 apply...as if...the exchange were a reorganisation of its share capital"
As I read it this is deeming any exchange that meets the conditions of 135(2) to be a reorganisation without reference to the conditions in s126(2). So there is no need to have shares in proportion to existing shareholdings.
NB a reorganisation under s136 is different again because of the conditions in Sch 5AA which do require shares to be issued in proportion.
If s135 does apply then I don't think the value shifting provisions of ss29 and 30 can apply because these only apply to "...transactions which are disposals of assets..." (s29) or "...the disposal of an asset..." (s30). If 135 applies then there is deemed to be no disposal.
Yes..
..I can see that I might be wrong about this. I will take another and longer look.
Not an easy one!!