Chapter 8 Takeovers Flashcards
1
A takeover occurs when a company acquires more than 50% of the shares in another company. A company can take over another company by acquiring all of the shares in the target company. They can do this wholly in cash, by offering new shares in their company in exchange for the shares already owned or a mixture of cash plus new shares. If the shareholders accept this, they will be disposing of their shares, and CGT implications apply.
Share for share exchanges – also called paper for paper exchanges. Where old shares are swapped for new shares, there is no disposal for capital gains purposes, this applies automatically, and no claim is required. The new shares will have the same base cost and acquisition date as the original shares.
Takeovers Involving cash – a chargeable gain only arises if all or part of the consideration given to the vendor on a takeover involves cash. If old shares are exchanged for just cash, this gain is calculated in the normal way, using the share matching rules.
If old shares are exchanged for a mixture of new shares plus cash, this is a part disposal for CGT purposes. A gain only arises on the cash element. We calculate the allowable cost by:
A/(A+B) x original cost
(A is the cash received on the takeover and B is the market value of the new shares received)
Different classes of shares – takeovers can involve vendors receiving different classes of shares in the new company. For example, ordinary and preference shares (no voting rights but receive preference for dividends). For CGT purposes it makes no difference whether the vendor receives ordinary shares or preference shares, they are both chargeable assets, so we calculate capital gains on sale in the normal way.
Interaction with Substantial shareholdings exemption – provided conditions are met, if a gain was incurred at the time of a share for share exchange, the gain would be exempt due to SSE and the new shares would have a base cost of their market value at the time of exchange, rather than the base cost of the original shares. The SSE applies where:
• An investing company
• Which has held a substantial shareholding (10%) in an investee company throughout a 12-month period within the six years prior to the disposal
• Disposes of any shares in the investee company
