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Management buyout through a company reorganisation - introduction

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Where the managers of a company who own shares in the company want to effect a management buyout and run the company themselves, it may be possible to achieve this through a company reorganisation by way of a share exchange. In this way they can effect the buyout without incurring any charge to capital gains tax and without using their own resources to buy out the departing shareholder(s).

For example, assume that the shares in Oldco Ltd were held as follows:

  • 52% Mr Archer
  • 16% Mr Brown
  • 16% Mrs Clarke
  • 16% Mr Davies

Mr Archer wants to retire and sell his shares in Oldco Ltd. The other shareholders want to buy his shares and continue running the business. They form another company, Newco Ltd which acquires all the shares in Oldco Ltd. Newco Ltd pays Mr Archer cash for his shares and issues shares to Mr Brown, Mrs Clarke and Mr Davies in exchange for theirs. The cash for the purchase of Mr Archer's shares can come either:

  • from the cash reserves of Oldco Ltd after Newco Ltd has taken it over;
  • or from a bank loan, for example, made to Newco Ltd and secured against the assets of its new subsidiary.

Although a company purchase of own shares can be an easier and cheaper alternative to a company reorganisation, it will not generally be appropriate in the case of a management buyout. The new, or previously minority shareholders will be reluctant to take over the contingent liabilities and commitments that built up in the company under the previous controlling shareholders.

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