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Arranging for a company to take over another company - introduction

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As a business grows it may decide to expand through the agreed acquisition of another company. If it has been trading for some time, it is likely that the target company will have built up contingent liabilities, warranties and commitments. To distance your client from these potential liabilities it is common to ask the shareholders of the target company to arrange to put a new holding company above the old company, providing a clean new company for the takeover.

The creation of the holding company is achieved by:

  • the shareholders in the target company (Oldco) forming a new holding company (Newco);
  • Newco acquiring the shares in Oldco in exchange for shares in Newco.

Provided the transaction is carried out correctly:

  • there will be no disposal for capital gains tax purposes when newly issued shares are issued in exchange for the existing shares; and
  • the original shareholding and the new shareholding are treated as a single continuous asset.

The full amount of any capital gain will then be chargeable on the sale of the shares in new holding company when it is taken over.

While it may assist the takeover for the acquiring company to offer advice on the pre-takeover arrangements, they remain the responsibility of the target company and its advisers.

It should be noted that the fact gathering for this planning relates to the target company. If assistance is being provided to that company and its advisers they will be required to provide the necessary information.

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