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Demerger relief

Change of control issues

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I have a holding company client with 4 trading subs. Currently owned 50:50 (A/B) with no outright control. A third individual (C) - unconnected - is interested in investing but doesn't like the look of one of the subs. One option is for him to acquire shares in each of the other 3 subs but the current owners would prefer shareholdings to remain at the top, so have suggested demerging the sub. There is also a possibility that that sub may be sold in the next year or so, but there are currently no discussions. My question is twofold. Assuming that commercial rationale can be demonstrated for a demerger (which is not a given):

(a) I don't believe that the mere possibility of a sale is enough to invoke CTA 2010 s1081(5)(d) - there is no scheme or arrangement in place for a change of control (ie sale)

(b) Although control of the holding company could then be exercised by either of groups A/C or B/C (as well as, is currently the position, A/B) I don't interpret this as acquisition of control by any person or persons other than the members of the holding company. But I'm less certain on this point than I am on (a).

Thoughts, anyone?

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By Tax Dragon
07th Nov 2019 09:52

My thought is read the context. Or even just the sentence. Thus: "This subsection applies to any scheme or arrangement the main purpose or one of the main purposes of which is… the acquisition by any person or persons, other than the members of the distributing company, of control…"

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Replying to Tax Dragon:
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By Wilson Philips
07th Nov 2019 10:11

That's the "sentence" that I was having trouble with. My interpretation is that the only person, other than the members of the company, that could acquire control would be C. Although he would control the company together with A or B, he would not himself have acquired control. I'm just not 100% certain, though, so was looking for assurance (or contrary opinion).

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By Tax Dragon
07th Nov 2019 10:26

My thought was prompted by the observation that you seemed to be considering the effects, rather than the purposes, of the distribution and investment. I thought you may have forgotten the first part of the sentence.

In any event, does the sub-clause in (d) mean that you should ignore the acquisition of control by the members of the distributing company? If so, since no-one will have control without working together (that word again… and this time it's in statute) with one of those members, no-one would be acquiring control as envisaged under (d).

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Replying to Tax Dragon:
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By Wilson Philips
07th Nov 2019 10:55

I think we are interpreting it in the same way. Both the effect and purpose is to allow a 3rd person to acquire shares in H.

My doubt?

At the moment, control of H is held/exercised by A/B. Following the demerger/investment, control will (potentially) be held/exercised by, among other combinations, A/C. One is a member of H but the other is not. Can it be said that the acquisition of control by A/C (can one in fact say that there has been an acquisition of control?) is acquisition by persons other than members of H? I don't think so, but as I say looking for some reassurance.

I suppose that another way of looking at it is to say that if someone has acquired control then someone must have relinquished control. In this case A/B will still be able to exercise control so no disposal/acqusition of control. The stated purpose of the legislation is of course primarily to deal with situations such as a sale of relevant companies so I suspect that I may well be over-thinking things.

At the end of the day, if they go ahead we will be applying for clearance so that should put the matter to bed.

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By Tax Dragon
07th Nov 2019 11:05

Is A/C "person or persons other than the members of the distributing company"?

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By Wilson Philips
07th Nov 2019 11:29

My problem was that one is and one isn't. I do think that I've been overthinking, though.

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By The Dullard
07th Nov 2019 11:31

I don't think there has been the *acquisition* of control by anybody, and since nobody's acquired control, I don't really give a damn who they were before the non-acquisition.

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Replying to The Dullard:
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By Wilson Philips
07th Nov 2019 11:35

That's good enough for me!

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By Tax Dragon
07th Nov 2019 12:25

But it's too subtle for me. (I'm having a bad hair day.)

A/C have *acquired* control (as A/C *did not have* control before, and now they do).

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By The Dullard
07th Nov 2019 12:50

But you're using the combination A/C rather than A being one of a number of persons acquiring control. A is already one of a number of persons that has control, so can't be considered to be one of a number of persons that is acquiring control. The only new person is C and C is not acquiring control.

Given the potential sale within a relatively short period of time though, I'd be inclined to avoid a statutory demerger and go down the liquidation or capital reduction demerger route to avoid the argument with HMRC later.

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By Tax Dragon
07th Nov 2019 13:06

Or provide all the facts and get clearance.

Maybe it was your comment about not giving a damn about the previous interests that threw me, as your expanded reasoning apparently does rely on the previous interests... so (I think) seems to be the same point I'd made. In which case I have pre-agreed.

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By Wilson Philips
07th Nov 2019 13:10

I'd thought about the other options - liquidation is probably a non-starter due to costs but the capital reduction route may be worth investigating (although we'd still need to go to HMRC for clearances).

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