Buried behind the headline changes to stamp duty on residential properties in yesterday’s Autumn Statement were two key measures which will affect businesses, particularly large public companies:
- A ban on takeovers structured as cancellation schemes of arrangement
- A ban on offering shareholders a choice of receiving a return of value as either capital or income.
Changes to takeovers
Over recent years, cancellation schemes of arrangement have become the preferred structure for large public company takeovers in the UK. Under this structure, rather than shares being transferred directly to the offeror, the existing shares in the target are cancelled and new shares are then issued to the offeror. The end result is the same; the existing shareholders receive value for their shares and the offeror assumes control of the target.
The key advantages of this structure are:
- a lower threshold for obtaining control: a scheme of arrangement becomes binding on all shareholders once it is approved by 75% of them. With a traditional takeover offer, 90% of the shareholders must have accepted the offer before the offeror can mop up the remaining minorities; and
- no stamp duty is payable: there is no transfer of shares to the offeror (which would be subject to stamp duty). Instead, the offeror acquires control by means of a new issue of shares on which no stamp duty is payable.
It is this second advantage which has attracted the Chancellor’s attention, with him being keen to ensure that takeover structures which achieve the same outcome are treated the same for stamp duty purposes. Early in the New Year, therefore, changes will be made to the Companies Act 2006 which will prohibit reductions in share capital by target companies in takeovers conducted using schemes of arrangement. The Chancellor hopes this will ‘protect the stamp tax base’.
However, this change overlooks the other key advantage in effecting a takeover by means of a scheme of arrangement, namely the lower threshold for obtaining control. As a result, offerors may find it harder to takeover targets with a very disparate shareholder base.
Will this trigger a flurry of takeovers as offerors scramble to complete before the changes come into effect?
Changes to the taxation of shareholder returns
In some circumstances, a company may decide to return surplus cash to its shareholders rather than retaining that cash in order to fund future growth. Various methods are available to do this, including one known as a ‘B Share Scheme’. Using this method, a new class of ‘B shares’ is created and shareholders are offered a choice of whether they receive the return in the form of income (via a dividend) or capital (via a redemption or buyback of shares). Higher or additional rate individual tax payers will generally prefer to receive the return in the form of capital which will be taxed at a lower rate.
This perceived tax advantage has also attracted the Chancellor’s attention who has announced that, with effect from 6 April 2015, any amount received by a shareholder in circumstances where they are offered a choice of how to receive that amount will be taxed as dividend income.
Will this lead to a rush of companies returning value prior to 6 April 2015 in order to offer their shareholders maximum flexibility?