586 Company amalgamations by exchange of shares

Summary

This section provides that, with the necessary modifications, the rules in section 584 relating to the reorganisation or reduction of a company’s share capital apply also in the case where a company issues shares to a person in exchange for shares or debentures of another company. The exchange is treated as if the 2 companies were one and the same company and the exchange of shares were a reorganisation of its share capital. Thus, the exchange is not a disposal for capital gains tax purposes. In general, the section is concerned with the situation where, after the exchange, the company issuing the new shares has control of the second company. The exchange must be for bona fide commercial reasons and not part of a tax avoidance scheme. The section also applies where debentures, loan stock or other similar securities are allotted or issued prior to 4 December 2002 and in certain limited circumstances where they are issued on or after that date. The section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.

Details

Application of section 584

(1) Where a company issues shares or debentures to a person in exchange for shares and debentures of another company, the rules of section 584 relating to a reorganisation of capital apply with any necessary modifications as if the 2 companies were the same company and the exchange were a reorganisation of its share capital.

Thus, for example, if X Ltd issues its shares to a person in exchange for shares in Y Ltd, that person is treated as having acquired the shares in X Ltd at the same time and for the same cost as his original holding in Y Ltd, and there is no charge to capital gains tax on the occasion of the exchange. The rule applies to a person who accepts new shares in whole or part satisfaction for giving up the original shares, even where the person is given the option to take the whole of the consideration in cash. It applies to an exchange of debentures for shares and vice versa as well as to an exchange of shares for shares.

The rule applies as if the 2 companies were the same company so that if, on the amalgamation, the shareholders of one company receive cash in addition to shares, the cash is treated as a capital distribution and chargeable accordingly. (See subsection (3)(c) regarding the issue of debentures on or after 4 December 2002)

Conditions for relief

(2) The section applies only where the company issuing the shares or debentures has or, in consequence of the exchange, will have control of the other company, or makes the issue as a result of a general offer to members of the other company or any class of them on a condition such that if it were satisfied it would have control of the other company.

Thus, the condition for the section to apply is in general that the company issuing the shares or debentures will have control of the other company. The section, therefore, applies where the issuing company —

• acquires part or all of the minority share or debenture holdings in an existing subsidiary,
• makes a successful take-over bid for the other company, or
• completes a successful take-over bid for the other company by acquiring the rest of its shares or debentures.

The section also applies where the issuing company has made unconditional a general offer which was previously conditional on its acquiring control of the other company. Thus, if X Ltd as part of a take-over bid made an offer to acquire the shares of Y Ltd on condition that the offer is accepted as to more than 50 per cent of that company’s share capital and then, during the negotiations, makes the offer unconditional, the section applies even if the take-over bid fails.

Exchange must be for bona fide commercial reasons

(3)(a)&(b) The section does not apply to the issue of shares by a company by means of an exchange referred to in subsection (1) unless the exchange is for bona fide commercial reasons and is not part of a tax avoidance scheme. For this purpose, “shares” includes stock, debentures, and the interests in a company with no share capital held by members of the company, and also options in relation to such “shares”.

Issue of debentures

(3)(c) The section also applies where debentures, loan stock or other similar securities are allotted or issued prior to 4 December 2002 and in certain limited circumstances were they are issued on or after that date. The circumstances are where the debentures are issued on or after 4 December 2002—

• pursuant to a written binding agreement made before that date;
• by one company to another where both companies are members of the same group (within the meaning of section 616) throughout the period commencing one year before and ending one year after the date of issue; or
• to a company quoted on a recognised stock exchange and its board of directors had, before 4 December 2002, made a public announcement that they had agreed the terms of a recommended offer to be made for the company’s entire issued, and to be issued, ordinary share capital.

Exclusion of investment undertakings

(3)(d) The section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.

Relevant Date: Finance Act 2021