EMI does not use the definition of personal company for ER purposes. Provided they qualify under Condition C or Condition D then for the moment they qualify as before.
It doesn't have to be wound up, the test is only whether the shareholder would be entitled to 5% of the assets in a winding up.
And it has to have been your personal company throughout the period of a year (or 2) prior to the disposal so any non-commercial loans during that time could dilute the shareholder.
Or you could take a hypothetical example of a person who sets up a company with £100 share capital and injects £100,000 to develop an app or some such thing. After 15 months the money is spent but they now have the app and someone comes along and offers £10m for the company with the loan repaid at completion. The company has no reserves and a notional £100 would go to the creditor on a notional winding up with nothing for the shareholder. I don't think ER would be available.
I think you would just insert a "ZA" class randomly like they do in legislation.
The legislation says if there are no reserves you take a notional £100; the conclusion you come to is the same. Someone must be entitled to the £100 otherwise there is no reason to have it.
Therein lies the problem. Someone must be entitled to the company's reserves, they are, after all, shareholders' funds. Where there is one class of share then I think you are right. Where there is more than one class of share I don't think no one can have an entitlement because the reserves belong to the shareholders. One could say they are equally entitled. Even then, if someone is voted £1, the others are still entitled to the balance until it is voted elsewhere.
Similarly, where you have two classes of share, an "A" share which is vanilla ordinary and a "B" share which is entitled to the first £100 and then ranks pari passu with the "A" share. With £100 of reserves "A" has no entitlement. With £200 of reserves "A" has a 25% entitlement.
The legislation says you look at the accounts for the accounting period and it is the entitlement during that accounting period. If you vote dividends after the accounting period then your entitlement during the period is unaffected by what happens afterwards. And your entitlement during the period is only relevant to the previous period as the reserves may be materially different. On that basis I would say that the entitlement to alphabet shares is the same if they rank pari passu during the accounting period and cannot be affected by voting of dividends afterwards, nor during for the previous period.
Really what I am saying is that the legislation was intended for something entirely different and as far as ER is concerned is not fit for purpose.
So if you have a company with 5 classes of shares A, B, C, D and E which rank pari passu save that dividends are to voted by the directors and in one year, notwithstanding healthy reserves, the directors decide not to declare a dividend, what is their entitlement?
Yes, that is right. The test was originally meant to test whether there was a group for group relief purposes.
I think (I have to look at this in more detail and wrap a cold towel round my head) if you take the test to its logical conclusion a holder of 100% of 100 ordinary £1 shares who loans the company £50,000 interest free might not be entitled to more than 5% of the assets in a winding up and hence not get ER on the disposal even though there are no other shareholders or creditors.
Even with a waiver of all dividends I am not sure there is a problem. The rights attaching to the shares is for a dividend and this is in the articles. The waiver does not alter the articles, it just says "I don't want it". If the shares were sold they would be sold with an entitlement to the same dividends as all the other shares of that class. I think the problem is the historic aspect. Would it be "you weren't entitled to a dividend because you waived it" or "you were entitled to a dividend but you waived it". It may yet be a case of legislate in haste, repeal at leisure; it happened with goodwill; it happened with associated disposals and may yet happen with this.
Again, I think the historic position may be the issue.
However, what if the directors say "This year we will declare no dividends"? Does that mean that it can't be the personal company of any of the shareholders? Shareholders funds is the residual amount payable to the ordinary shareholders after any preferential rights; so if no one else is entitled to them, the ordinary shareholders are and they are entitled to them pari passu. Who is entitled to them otherwise? How those funds are then distributed is a matter for the directors. I think if you look at in the abstract at any point in time you would say that all the shareholders are equally entitled absent a decision of the directors.
I throw these questions out as much to try to clarify my own thoughts (and question them) as to challenge in order to find some sort of answer.
I think waivers are perhaps less of an issue than alphabet shares. With a waiver the shareholders have an entitlement under the articles that is constant but the shareholder makes a personal decision not to have it. With alphabet shares, although they rank equally, it is the directors who decide. Also, because of the need to have satisfied the conditions for a year (soon to be two) it might be the historic position that we have to look at. I would tend to agree with you that alphabet shares should be OK; however, the tests applied were never meant to apply to situations like this (they were meant to ascertain whether there was a group relationship during an accounting period AFTER the period had ended) and this is just lazy cut and paste drafting.