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Issues and trends in share capital
By Catherine Gannon and Helen Curtis of
Gannons Solicitors
LexisNexis® Confidential 2
Agenda
1. Tax treatment of private companies and entrepreneurs
2. Trending share types: it is a...
LexisNexis® Confidential 3
By Catherine Gannon, CTA, Solicitor
Tax makes ordinary shares
class(y)
LexisNexis® Confidential 4
Increasing tax pressures on successful entrepreneurs
SUSPECT
Name: Fred Smith
Age: 55
Occupatio...
LexisNexis® Confidential 5
Increasing tax pressures on successful entrepreneurs
SENTENCE
•No personal allowance because in...
LexisNexis® Confidential 6
Tax lessons for entrepreneurs
• All about capital growth! Focus on exit
• Use capital instead o...
LexisNexis® Confidential 7
Share classes that encourage growth
 Flowering shares
 Waterfall shares
 Freezer shares
 Sh...
LexisNexis® Confidential 8
Summary of why capital growth is attractive
• Capital assessed to CGT where the highest rate of...
LexisNexis® Confidential 9
Freezing share rights – drafting ideas
1.1 On a return of assets following a Liquidation or oth...
LexisNexis® Confidential 10
Waterfall shares - drafting
On a return of assets or a sale the surplus assets of the Company ...
LexisNexis® Confidential 11
Employee Share Schemes & Share Options
Awarding equity to employees:
•Tax efficient (nil or 10...
LexisNexis® Confidential 12
Employee Share Schemes & Share Options
Awarding equity to employees:
Statistics:
•In 2013-14, ...
LexisNexis® Confidential 13
Impact on dividends
• New dividend tax allowance from April 2016 free £5,000 a year
• Expect b...
LexisNexis® Confidential 14
By Helen Curtis, Solicitor
Current Trends – Main themes
for investors
LexisNexis® Confidential 15
Introduction
LexisNexis® Confidential 16
Trends in Shareholder’s Agreement
• Investor trends
• Employee Shareholder trends
• Joint Vent...
LexisNexis® Confidential 17
Investors
• SEIS/EIS
Tax efficient but cannot be preference shares
• SEIS/EIS compliant
Undert...
LexisNexis® Confidential 18
Investors
• Reserved matters
Shareholder threshold vs board representative
• Drag-along rights...
LexisNexis® Confidential 19
Investors
• Employee Incentives
Excluded from pre-emption protections
LexisNexis® Confidential 20
Investors
• Behaviour
Information requirements
Reporting requirements
• Warranties
Share Purch...
LexisNexis® Confidential 21
Employees
• Good Leavers/Bad Leavers
Incentive to stay
Administrative burden if employees leav...
LexisNexis® Confidential 22
Employees
• Employment expert
Barrister or Solicitor of x years experience
• Power of attorney...
LexisNexis® Confidential 23
Employees
• Restrictive covenants
Usually longer periods permissible than in Employment Agreem...
LexisNexis® Confidential 24
Joint Venture
• Mediation Provisions
Position without Shareholders’ Agreement
Alternatives to ...
LexisNexis® Confidential 25
Thank you!
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issues and trends in share capital

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The number of stocks available to shareholders, (share capital), generates a number of associated legal issues. Gannons talk about the current issues and trends in share capital. They tackle key concerns such as pre-emption rights; share buy-backs, as well as the requirements linked to altering share capital.

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issues and trends in share capital

  1. 1. Issues and trends in share capital By Catherine Gannon and Helen Curtis of Gannons Solicitors
  2. 2. LexisNexis® Confidential 2 Agenda 1. Tax treatment of private companies and entrepreneurs 2. Trending share types: it is all about growth! 3. Trends for investors, employees and joint ventures 4. Effect of tax on Shareholders’ Agreements design: prohibited matters, restrictive covenants etc.
  3. 3. LexisNexis® Confidential 3 By Catherine Gannon, CTA, Solicitor Tax makes ordinary shares class(y)
  4. 4. LexisNexis® Confidential 4 Increasing tax pressures on successful entrepreneurs SUSPECT Name: Fred Smith Age: 55 Occupation: entrepreneur and SME owner Salary: £150k Dividends: £100k Other: small property portfolio Activities: subscribed for shares @£1, sells for £1m
  5. 5. LexisNexis® Confidential 5 Increasing tax pressures on successful entrepreneurs SENTENCE •No personal allowance because income over £120k •Additional rate taxpayer: income @ 45% •Only £5k dividend allowance a year •High tax rate on dividends (38.1% in 2016) •Entrepreneur’s relief @10% but the lifetime limit might be decreased •Interest on buy to let no longer deductible •Pressure to recruit and retain talent •Maxed out pension
  6. 6. LexisNexis® Confidential 6 Tax lessons for entrepreneurs • All about capital growth! Focus on exit • Use capital instead of income whenever possible to use 10% entrepreneurs’ relief • Creative ideas emerging
  7. 7. LexisNexis® Confidential 7 Share classes that encourage growth  Flowering shares  Waterfall shares  Freezer shares  Shares for employees
  8. 8. LexisNexis® Confidential 8 Summary of why capital growth is attractive • Capital assessed to CGT where the highest rate of tax is 28% and there is no NI • If you qualify for entrepreneurs' relief rate of CGT is 10% on gains of up to £10 million (lifetime allowance) • Three basic rules • 5% of share capital (exception is EMI) • Voting rights • Employed/director for 12 months pre-sale
  9. 9. LexisNexis® Confidential 9 Freezing share rights – drafting ideas 1.1 On a return of assets following a Liquidation or otherwise the surplus assets of the Company remaining after payment of all of its liabilities (“Surplus Assets”) shall be distributed pari passu between the holders of the A Ordinary Shares and the B Ordinary Shares (as if the same constituted one class of share, pro rata based on each holder’s respective holding). 1.2 The C Ordinary Shares and D Ordinary Shares shall not give rise to a right to Surplus Assets upon Liquidation unless the Value before payment of all of the Company’s liabilities is at or exceeds the Threshold. 1.3 In the event that the C Ordinary Shares and the D Ordinary Shares do not give rise to a right to Surplus Assets there is a compulsory transfer.
  10. 10. LexisNexis® Confidential 10 Waterfall shares - drafting On a return of assets or a sale the surplus assets of the Company remaining after payment of all its liabilities (“Surplus Assets”) shall be distributed in the following order of priority (a) First, but only where such Surplus Assets shall exceed £5,000,000, each holder of A Ordinary Shares shall be entitled to 25% of all such Surplus Assets for each A Ordinary share held by him, in preference to any amount paid to any holder of the Series B shares, Series C shares and Series D shares, (b) Second, (i) where Gross Proceeds shall exceed £10,000 only, each holder of A1 Ordinary Shares shall be entitled to 0.25% of all Surplus Assets for each A1 Ordinary Share held by him, and (ii) where Gross Proceeds shall exceed £20,000,000 only, each holder of A1 Ordinary Shares shall be entitled to a further 0.125% of all Surplus Assets for each A1 Ordinary share held by him (c) Third, or first in the event that such Surplus Assets shall not exceed £5,000,000, the holders of the X shares shall be entitled to be paid an amount equal to the Subscription Price for their X shares etc
  11. 11. LexisNexis® Confidential 11 Employee Share Schemes & Share Options Awarding equity to employees: •Tax efficient (nil or 10% CGT) •Improves business performance •Improves employee motivation •Competition already does it!
  12. 12. LexisNexis® Confidential 12 Employee Share Schemes & Share Options Awarding equity to employees: Statistics: •In 2013-14, the total value of shares and options awarded was around £3.45bn, 21% higher than in 2012-13. •There were 4,000 total companies granting options or shares in schemes in 2013-14. •The number of companies operating share schemes has continued to grow to 11,460 companies in 2013-14.
  13. 13. LexisNexis® Confidential 13 Impact on dividends • New dividend tax allowance from April 2016 free £5,000 a year • Expect big dividends before April 2016 • Structure dividend pay out >£5,000 and work towards exit • Sale or voluntary winding up – HMRC will deny entrepreneurs' relief on cash balances in excess of trading requirements
  14. 14. LexisNexis® Confidential 14 By Helen Curtis, Solicitor Current Trends – Main themes for investors
  15. 15. LexisNexis® Confidential 15 Introduction
  16. 16. LexisNexis® Confidential 16 Trends in Shareholder’s Agreement • Investor trends • Employee Shareholder trends • Joint Venture trends
  17. 17. LexisNexis® Confidential 17 Investors • SEIS/EIS Tax efficient but cannot be preference shares • SEIS/EIS compliant Undertaking that the Company will remain SEIS or EIS compliant
  18. 18. LexisNexis® Confidential 18 Investors • Reserved matters Shareholder threshold vs board representative • Drag-along rights Risk of joint and several liability
  19. 19. LexisNexis® Confidential 19 Investors • Employee Incentives Excluded from pre-emption protections
  20. 20. LexisNexis® Confidential 20 Investors • Behaviour Information requirements Reporting requirements • Warranties Share Purchase Agreement vs no warranties
  21. 21. LexisNexis® Confidential 21 Employees • Good Leavers/Bad Leavers Incentive to stay Administrative burden if employees leave • Pre-determined Fair Value Traditionally used external valuer Pre-agreed formula based on EBITDA
  22. 22. LexisNexis® Confidential 22 Employees • Employment expert Barrister or Solicitor of x years experience • Power of attorney To effect share transfer if employee absent
  23. 23. LexisNexis® Confidential 23 Employees • Restrictive covenants Usually longer periods permissible than in Employment Agreements • ESS shares Particular issues for the new Employee Shareholder status
  24. 24. LexisNexis® Confidential 24 Joint Venture • Mediation Provisions Position without Shareholders’ Agreement Alternatives to mediation • Privileged Relations More extensive definitions to include new family structures
  25. 25. LexisNexis® Confidential 25 Thank you!

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