Getting rid of a shareholder who wants part of the business - introduction
If a company has more than one distinct activity and there is a falling out amongst the shareholders so that they can no longer work together to run the company's business effectively, a scheme of reconstruction could be considered as a way of getting rid of a shareholder who wants to take part of the business with them rather than receive cash for their shares. A scheme of reconstruction would include the situation where the business of the original company is divided and transferred to other companies which issue shares to different shareholders in the original company.
For example, Oldco has one class of ordinary shares owned equally by X and Y. The company sells machine tools in the UK and abroad, with X dealing mainly with the UK business and Y with the export business. Having fallen out, they can no longer deal with each other and as this is having an adverse effect on the company's business they decide to split up, dividing the business between them.
As a first step, the shares in Oldco are reorganised into A and B shares. The UK business is allocated to the A shares, which are issued to X, and the export business is allocated to the B shares, which are issued to Y. If the values of the businesses are not the same, cash is allocated in such a way as to even up the values of the pools of assets before the issue of the shares. If there is insufficient cash, other assets or liabilities can be allocated in such a way as to even the asset pools.
To carry out the reconstruction, X sets up Newco 1 and Y sets up Newco 2. Newco 1 issues shares to X in exchange for X's A shares in Oldco and Newco 2 issues shares to Y in exchange for Y's shares in Oldco. Oldco declares a dividend on the A shares, paid by transferring the UK business to Newco 1, and a dividend on the B shares, paid by transferring the export business to Newco 2.
Provided the conditions are met, the scheme of reconstruction can be carried out without any liability to capital gains tax arising on either the shareholders or Oldco.
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