By Mark Roberts, Partner in the Corporate department of Leman Solicitors
A share for undertaking transaction occurs when one company (the Acquiring Company) acquires a business or undertaking from another company (the Disposing Company) and, in return, issues shares directly to the Disposing Company’s shareholders. If structured correctly, it can qualify for reliefs for both capital gains tax and stamp duty, and can be a useful way of reorganising a business prior to a sale or investment where either:
- the undertaking being transferred constitutes part only of the Disposing Company’s business, and the shareholders wish to retain the remainder of the business in the Disposing Company; or
- the Disposing Company has a complicated trading history which might put off potential acquirers.
The purpose of this article is to consider the main Irish company law considerations arising on a share for undertaking transaction.
The starting point always is the reserves position of the Disposing Company. Because the shares being issued by the Acquiring Company are going directly to the shareholders of the Disposing Company, the transaction will be considered a distribution by the Disposing Company for the purposes of the Companies Act 2014 (the Act), which pursuant to section 117 of the Act, must be funded out of distributable profits. If distributable profits are at least equal to the book value of the transferred undertaking, then the transaction is permissible and, pursuant to section 119(2)(b) of the Act, the amount of the distribution is taken at book value.
If the Disposing Company does not have sufficient distributable profits, then a capital reduction may be a solution. The first point to check is whether the company has sufficient share capital available to fund the creation of the reserves required. If this is the case, the Disposing Company could consider either a capital reduction under section 84 of the Act or, alternatively, a variation of company capital under section 91, which specifically facilitates share for undertaking transactions.
Assuming that the Disposing Company is a private limited company, the Summary Approval Procedure will be available under section 202 of the Act. This will require:
- A declaration of solvency by the directors of the Disposing Company;
- A report of a qualified auditor pursuant to section 208 of Act confirming that the declaration is ‘not unreasonable’; and
- A special resolution of the shareholders of the Disposing Company.
From the Acquiring Company perspective, company law considerations are more straightforward. One query that often arises is the paid-up value to be attributed to the new shares issued. While the transaction may be reflected at book value in the accounts of the Disposing Company, it is possible to ascribe the market value of the assets being transferred for this purpose in the Acquiring Company accounts.
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(This article is sponsored by Leman Solicitors.)