2014 Number 1 Share Capital Restructuring 81 Share Capital Restructuring Conor Sweeney Managing Director, CLS Chartered Secretaries Changing the Share Capital of a Company Share capital plays an important role in tax planning. The share capital of a company allows it to raise funds, determines the ownership of the company and provides a mechanism to transfer ownership from one party to another. When working with companies, directors and shareholders, tax advisers may use share capital to restructure companies and to develop an appropriate tax plan, and company secretarial professional advisers assist in implementing the advice. Companies change their shareholding for many different reasons, the main ones being: to introduce new investment and investors, to amend the rights attached to the shares, in shareholder disputes, in succession planning, in company reorganisations. Characteristics of a Share A share is a difficult thing to define, and I believe the best description to be an intangible accumulation of rights, interests and obligations. The main reasons for having different classes of share are that either the nominal values of the shares or the rights attached to them are different. Ordinary shares typically have the following rights, but the articles of association should always be reviewed to confirm: a right to receive notice of, attend and vote at general meetings, a right to participate in the profits of the company by way of a dividend, a right to the capital surplus on a winding-up of the company and to create a group structure and a right to notice and information from the company.
82 Share Capital Restructuring Ordinary shareholders are the last participators in a company to receive either a dividend or, on a winding-up, a return of capital, with preference shares ranking above ordinary shares for these purposes. Preference shares are often used by Enterprise Ireland or venture capital companies as a means of investing in a company. In my previous article Importance of Company Secretarial For Tax Advisers (Irish Tax Review, 25/4 (2012)), I discussed the rules that apply to holding meetings and approving resolutions. In this article, I will highlight how these company law rules are used in practice in order to examine some of the most common changes in share capital. These changes include: allotment of shares, transfer of shares, alteration of share capital, redemption of shares, buyback of shares, share for share exchange and share for undertaking exchange. Allotment of Shares The allotment of shares is the process by which a company allocates new shares to existing shareholders or to third parties. The directors generally have the ability to allot new shares in a company, but a number of points should be considered before doing so. Authority to allot shares The power to allot shares is vested in the directors by Table A of the Companies Act 1963. Section 20 of the Companies (Amendment) Act 1983 provides that the directors of a company shall not exercise any power of the company to allot relevant securities unless they are authorised to do so by the company in general meeting or by the articles of association of the company. The power lasts for five years from the date of incorporation or from the last time that the authority was renewed. Before an allotment of shares, the authority should be reviewed, and if the directors do not have the authority, the power may be renewed for a period of five years by passing an ordinary resolution (51%) of the members and filing a Form G2 with the Companies Registration Office (CRO). The company may wish to include the power in the articles of association by passing a special resolution (75%) and filing a Form G1 and an amended memorandum and articles of association with the CRO. Unissued authorised share capital Before shares may be allotted, the company must have sufficient unissued authorised share capital. The share capital clause in the memorandum and articles of association should be reviewed, and if the company does not have unissued share capital, the members must approve an increase in the authorised share capital. If a new class of shares is being created, the authorised share capital should be increased or unissued share capital converted into the new share class. Section 68 of the Companies Act 1963 provides the company with the power to alter its share capital, and the procedure to increase the authorised share capital is set out below. Pre-emption rights Section 23 of the Companies (Amendment) Act 1983 contains provisions on pre-emption rights, which give existing members the right of first refusal on any allotment of shares. These provisions are designed to protect existing shareholders by maintaining their proportion of shares on the allotment of new shares. Section 23 is usually disapplied or amended in the articles of association of a private limited company; however, the articles of association and any shareholders agreement should always be reviewed before allotment, and it must never be assumed that s23 has been disapplied. If pre-emption rights exist, the members must be given 21 days within which to accept or decline the offer, and the pre-emption rights may also be waived by the members in writing. Cash or non-cash consideration Shares may be issued for cash or non-cash consideration or a mixture of the two. Non-cash consideration may be shares in another company (share for share), machinery, stock, goods or services. A bonus issue of shares is deemed to be a non cash consideration allotment.
2014 Number 1 Share Capital Restructuring 83 If shares are allotted for non-cash consideration, a Form 52 (Form B6) should be submitted via the Revenue On-line Service (ROS) and the stamping certificate filed with the Form 52 with the CRO. Nominal value or at a premium Shares may be issued at a premium, which is the difference between the nominal value and the amount paid per share and often reflects the market value of the company. The share premium should be credited to the share premium account. The share premium account cannot be distributed to the shareholders except in limited circumstances. Shares cannot be issued at a discount. Approval of the allotment of shares Subject to the above being confirmed, the directors will be in a position to prepare a letter of offer in respect of the shares. Letters of application should be received, and a meeting of directors may be convened to approve the allotment of shares and to authorise the issue of share certificates. Share certificates should be issued to the shareholders within two months, and Form B5 (and Form 52, if applicable) filed with the CRO within one month of the allotment. The register of members and the register of allotments should be written up to reflect the allotment of shares. Transfer of Shares Shareholders have the ability to transfer some or all of their shares to existing shareholders or to third parties. Sections 79 90 of the Companies Act 1963 and Regulations 22 8 of Table A provide for the transfer of shares in a company. One of the main differences between a private limited company and a public limited company is that the directors of a private limited company have the right to refuse a transfer of shares. Directors refusing to register a transfer of shares must be acting in the best interests of the company and not in their own personal interests. Before a company proceeds with a transfer of shares, the memorandum and articles of association should be reviewed for any pre-emption rights or restriction of transfer. The company should also check whether any shareholders agreement contains provisions on the transfer of shares. A stock transfer form is the instrument used to execute a transfer of shares. Separate stock transfer forms should be used to transfer shares of different classes. Part I of Table A provides that the stock transfer form must be signed by the transferor and the transferee; however, most private companies disapply this provision and require only the transferor to sign it. If the transferee is availing of the stamp duty exemption, both transferor and transferee should sign the form. The signed stock transfer form and the share certificate should be presented to the company. The transfer of shares may be approved at a meeting of directors, subject to the stock transfer form being stamped or the stamp duty exemption statement being completed. The register of members and the register of transfers should be written up to date, and the new share certificate should be signed, sealed and issued, subject to the receipt of a stamped stock transfer form or a signed form with the stamp duty exemption statement. Stamp duty is payable on any transfer of shares where the value of the consideration or the market value of the shares exceeds 1,000. The rate of stamp duty is 1%, and the stock transfer form must be processed through ROS and the duty paid before a stamping certificate is issued. The transfer may be exempt from stamp duty if the value of the consideration or the market value of the shares is less than 1,000. If the parties are availing of the exemption, the stamp duty exemption statement should be completed on the back of the stock transfer form and signed by both parties. Alteration of Share Capital A company may alter both its authorised and its issued share capital. The Companies Acts provide the flexibility to alter share capital by: increase of the authorised share capital, consolidation of shares, and subdivision of shares. Increase of authorised share capital or creation of new class of shares Section 68(a) of the Companies Act 1963 provides that the company has the power to increase its share capital with new shares. A company usually increases its authorised share capital if there are insufficient shares available to allot or if the company is creating a new share class. The company must have the power in its articles of association to increase the authorised share capital.
84 Share Capital Restructuring The members may approve an increase in the authorised share capital by passing an ordinary resolution and, where required, a special resolution to amend the share capital clause in the memorandum and articles of association. A Form B4 and an amended memorandum and articles of association should be filed, with Forms G2 and G1, within 15 days. If a new share class has been created, the rights attaching to the new class should be inserted in the articles of association. Consolidation and subdivision Section 68(b) and (d) of the Companies Act 1963 and Table A provide the company with the power to consolidate and divide any or all of its share capital into shares of larger amount than its existing shares and to subdivide any or all of its existing shares into shares of smaller amount. The articles of association must contain the power to consolidate and/or subdivide the share capital. The members may approve the consolidation or subdivision of shares by passing an ordinary resolution and, if altering the authorised share capital, a special resolution. A Form B7 (Form 28) should be filed with Forms G2 and G1 and the amended memorandum and articles of association. Share Restructuring As discussed above, there are many ways to change the share capital of a company, and the more complex mechanisms would include: redemption of shares, buyback of shares, share for share exchange and share for undertaking exchange. These mechanisms may be used in succession planning, dealing with shareholder disputes, marriage break-ups, creating a tax group or selling a business. The CRO filing requirements include Form G2 for ordinary resolutions, Form G1 for special resolutions and Form B7 (Form 28) for redemption, cancellation or conversion of shares. Redemption of Shares The redemption of shares is a mechanism whereby a company uses its funds to redeem shares from an existing shareholder. Before a company can proceed with a redemption of shares, it must comply with the provisions in ss207 10 of the Companies Act 1990. Redeemable shares are often used to raise finance, with an option for the investor to have the shares redeemed at some point in the future. Section 207 of the Companies Act 1990 gives a company the power to issue redeemable shares and to redeem those shares accordingly. Section 210 of the Act allows a company to convert the shares proposed to be redeemed into redeemable shares in order for a redemption to proceed. Distributable profits One of the key provisions that a company must comply with in a share redemption is having sufficient distributable profits to fund the redemption. Section 45 of the Companies (Amendment) Act 1983 defines the distributable profits of a company as its net realised profits minus its net realised losses, i.e. tangible profits as stated in the relevant accounts. The relevant accounts are the financial statements in respect of the previous financial year that were laid before the members at the annual general meeting. Conditions for a redemption of shares Redeemable shares may be redeemed subject to the conditions in s207(2): The issue and redemption of redeemable shares must be authorised in the articles of association. Redeemable shares cannot make up more than one-tenth of the nominal value of the total issued share capital of the company. 1 Redeemable shares must be fully paid. The terms of the redemption must provide for payment in full on redemption. Redemption must be made out of profits available for distribution, except: 1 This rule will be removed under the new Companies Bill.
2014 Number 1 Share Capital Restructuring 85 Where a company proposes to cancel shares on redemption, such shares may also be redeemed out of the proceeds of a fresh issue of shares made for the purposes of redemption. Any premium payable on redemption must have been provided for out of the distributable profits of the company, except: Where the shares were issued at a premium, any premium payable on their redemption may be paid out of the proceeds of a fresh issue of shares made for the purposes of the redemption, up to an amount equal to the aggregate of the premiums received by the company on the issue of the shares redeemed or the current amount of the company s share premium account, whichever is less. In any such case, the amount of the company s share premium account shall be reduced by a sum corresponding to the amount of any payment made out of the proceeds of the issue of the new shares. Cancellation of shares or holding as treasury shares When shares are redeemed, they may be cancelled or held as treasury shares. Sections 208 and 209 of the Companies Act 1990 provide for cancelling the shares or holding them as treasury shares. Once the shares have been cancelled, the issued share capital is reduced by the number of shares that were redeemed and cancelled. If the shares are not cancelled, they are held by the company as treasury shares and may be reissued or cancelled at some future stage, with the terms approved by the members. Approval of a redemption of shares The members of the company must pass an ordinary resolution to approve the redemption of shares. If the shares to be redeemed have to be converted to redeemable shares, the members must pass an ordinary resolution to approve the conversion and a special resolution to amend the share capital clause in the memorandum and articles of association. Buyback of Shares A buyback of shares is similar to a redemption of shares, but there are some important distinctions. Like a share redemption, a share buyback uses the company s distributable profits to repurchase shares from a shareholder. The buyback of shares is provided for in ss211 14 of the Companies Act 1990. Section 211 provides that a company may, if authorised by its articles of association, purchase its own shares and that ss207 9, as set out above regarding redemption conditions, cancellation and treasury shares, apply also to a buyback of shares. Section 213 provides that a company shall not make a purchase of its own shares otherwise than in pursuance of a contract that has been authorised in advance. The terms of the proposed contract of purchase shall be authorised by the members passing a special resolution before the contract is entered into. A copy of the contract must be available for inspection by the members at the registered office for 21 days before the extraordinary general meeting (EGM). This meeting cannot be held at short notice, and so a buyback takes longer to complete than a redemption. The CRO filing requires a Form H5 noting the details of the buyback of shares. Conditions for a buyback of shares The buyback of shares must be authorised in the articles of association. The shares may be bought back in their existing form. The buyback must not result in the nominal value of the issued share capital that is not redeemable being less than one-tenth of the nominal value of the total issued share capital of the company. 2 The shares must be fully paid. The shares must be bought back only out of distributable profits. The contract must be made available for inspection at the registered office 21 days before the EGM is held. 3 21 days notice must be given for the EGM. The contract must be approved by passing a special resolution of the members. The shares may be cancelled or held as treasury shares. 2 This rule will be removed under the new Companies Bill. 3 This rule will be removed under the new Companies Bill. This will allow share buybacks to be completed more quickly as companies will not have to wait 21 days if members sign a consent to short-notice form.
86 Share Capital Restructuring Share for Share Exchange A share for share exchange involves a company issuing new shares or debentures to a person in exchange for that person s shares or debentures in another company. One of the reasons for implementing a share for share exchange is to create a group for company law and tax purposes. Using this mechanism, the acquiring company issues new shares to a person, and that person then transfers his or her shares in the target company to the acquiring company. Section 586 TCA 1997 treats the exchange of shares as if both companies are the same company and the exchange of shares is a reorganisation of its share capital. The exchange is deemed to be a disposal for capital gains tax purposes if the conditions of the section are met. Stamp duty is applicable on the transfer of shares, but relief can be obtained if the conditions set out in s80 of the Stamp Duties Consolidation Act 1999 are met: The parties must confirm to Revenue that there is a bona fide scheme of reconstruction of a company or companies, or of amalgamation of companies, that is not part of a scheme or arrangement the main purpose of which is to avoid tax. The acquiring company must be a limited liability company incorporated in Ireland or in another EEA State; the target company may be incorporated outside the EEA, but a company that does not have a share capital structure may have difficulty obtaining the relief. The acquiring company must either be incorporated with an object in its memorandum of association to acquire, or pass a resolution authorising an increase in its nominal or issued share capital in order to acquire, at least 90% of the issued share capital of the target company. The consideration paid for the shares in the target company that may be in cash or other non-share form is restricted to 10% of the total consideration. For these purposes, any liabilities assumed or discharged by the acquiring company are ignored. A statutory declaration setting out the details of the transaction must be sworn by a solicitor, If the statutory declaration is found to be false, or if the registered shareholders in the target company cease within two years to be the beneficial owners of the shares in the acquiring company, or vice versa, otherwise than as a result of a reconstruction, amalgamation or liquidation, the relief will be clawed back The acquiring company must allot and issue shares to the registered shareholders of the target company in consideration and exchange for their shares in the target company. The proportions must be maintained, but it is not necessary for the acquiring company to issue the same number of shares as are exchanged. The acquiring company must have control of the target company after the exchange. Company secretarial actions for a share for share exchange The memorandum and articles of association of the acquiring company should be amended. Shares in the target company are transferred from the registered shareholders to the acquiring company. Shares in the acquiring company are allotted to the registered shareholders in the target company. An s80 statutory declaration must be sworn by a solicitor. Stock transfer forms must be filed on ROS. The instrument in respect of which stamp duty relief is being claimed must be executed within 12 months of the date of registration of the acquiring company or the date of the resolution increasing the nominal share capital of the acquiring company. Share certificates must be issued and the registers of both companies updated. Share for Undertaking Exchange Instead of transferring the shares in the target company to the acquiring company, the trade of the target company may be transferred to the acquiring company in exchange for shares. In a share for undertaking exchange, the acquiring company issues shares either to the target company (a two-party exchange) or to the shareholders in the target company (a three-party exchange) in exchange for the undertaking (trade) or part of the
2014 Number 1 Share Capital Restructuring 87 undertaking of the target company. An undertaking must be a business, and in the case of a part of an undertaking, it must be capable of comprising a separate business. Stamp duty is applicable to the transfer of undertaking, but relief can be obtained if the conditions set out in s80 of the Stamp Duties Consolidation Act 1999 are met: The parties must confirm to Revenue that there is a bona fide scheme of reconstruction of a company or companies, or of amalgamation of companies, that is not part of a scheme or arrangement the main purpose of which is to avoid tax. The acquiring company must be a limited liability company incorporated in Ireland or in another EEA State; the target company may be incorporated outside the EEA. The acquiring company must either be incorporated with an object in its memorandum of association to acquire, or pass a resolution authorising an increase in its nominal or issued share capital in order to acquire, the undertaking or part of the undertaking of the target company. The consideration paid for the undertaking of the target company that may be in cash and other non-share form is restricted to 10% of the total consideration. For these purposes, any liabilities assumed or discharged by the acquiring company are ignored. A statutory declaration setting out the details of the transaction must be sworn by a solicitor. If the statutory declaration is found to be false, or if the registered shareholders in the target company (three-party exchange) or the target company itself (two-party exchange) cease within two years to be the beneficial owners of the shares in the acquiring company, otherwise than as a result of a reconstruction, amalgamation or liquidation, the relief will be clawed back. The acquiring company must allot and issue shares to the registered shareholders in the target company (three-party exchange) or to the target company itself (two-party exchange) in consideration for the undertaking of the target company. Company secretarial actions for a share for undertaking exchange The memorandum and articles of association of the acquiring company should be amended. The undertaking of the target company is transferred to the acquiring company. Shares in the acquiring company are allotted either to the registered shareholders in the target company or to the target company itself. An s80 statutory declaration must be sworn by a solicitor. The transfer of undertaking must be processed on ROS. The instrument in respect of which stamp duty relief is being claimed must be executed within 12 months of the date of registration of the acquiring company or the date of the resolution increasing the nominal share capital of the acquiring company. Share certificates must be issued and the registers of both companies updated. Conclusion It is important, when implementing a tax plan or tax advice, that the necessary minutes and resolutions are prepared to reflect the changes and are approved by the appropriate parties, being the directors or members. The CRO forms should then be filed, and the statutory register updated to reflect the changes. Failure to record the approval of the proposed changes correctly may mean that the changes have no legal effect. This may lead to Revenue seeking clawbacks of reliefs granted or legal title to shares not being changed as intended. Read more on Company Reorganisations and Restructuring Tax and Legal Considerations, John Cuddigan, 2012 Seminar