UK: Allied Domecq Plc - Disposal of UK Retail Estate

Corporate Tax Bulletin January 2000
Last Updated: 9 February 2000

Ashley Greenbank and Simon Newsham consider the structures devised for Whitbread and Punch Taverns respectively, in their battle to gain control of the UK retail pub business of Allied Domecq.

These two innovative structures have formed new ideas on how a group can be broken up to achieve the clients' commercial and tax objectives.

A The Whitbread Proposal

Steps

The original Whitbread proposal involved three basic steps: (i) a cancellation scheme to insert a new holding company; (ii) an intra-group transfer of shares in a company owning the retail pub estate; and (iii) the reduction of capital of the new holding company and the transfer of the shares in the company owning the pub estate to Whitbread in consideration for an issue of shares to Allied Domecq shareholders.

1 Cancellation scheme

The first step is a court approved scheme of arrangement under section 425 of the Companies Act 1985. Pursuant to the scheme, the shares in Allied Domecq were to be cancelled and new shares in Allied Domecq issued to a new holding company (referred to in this note as "New Allied Domecq"). New Allied Domecq, in turn, was to issue new shares to the former Allied Domecq shareholders.

2 Intra-group transfer

Under the court scheme, Allied Domecq was entitled to transfer shares in a company holding the retail businesses, Allied Domecq Retail (Holdings) Limited ("Retail"), to New Allied Domecq for a consideration equal to the book value of the shares in Retail. The consideration was to be left outstanding on inter-company account.

3 Reduction of capital and transfer

Under a court approved reduction of capital under section 135 of the Companies Act 1985, the share capital of New Allied Domecq was reduced. New Allied Domecq was to satisfy the liability to its shareholders arising under the reduction of capital by procuring the issue to New Allied Domecq shareholders of shares in Whitbread.

New Allied Domecq procured the issue of Whitbread shares to each of its shareholders by transferring to Whitbread the shares in Retail. This transfer was to take place under an agreement between New Allied Domecq and Whitbread entered into prior to the scheme and conditional upon court approval of the scheme.

Issues

1 Cancellation scheme

  • The court scheme requires the approval of a 75% majority of shareholders attending and voting at a meeting of the shareholders convened for the purpose. The scheme also requires the approval of the court. The involvement of the court means that the structure is dependent upon a court timetable.
  • Subject to Inland Revenue clearance1, the cancellation scheme is not treated as involving a disposal by shareholders for the purposes of tax on capital gains. Any inherent capital gains are "rolled over" into New Allied Domecq shares. New Allied Domecq acquires Allied Domecq shares at a base cost equal to their current market value.
  • The important element in relation to the remainder of the scheme (in particular step 3) is that, for the purpose of determining whether future returns on the shares are distributions or a return of capital, the capital paid up on New Allied Domecq shares is treated as being an amount equal to the value of Allied Domecq shares issued to New Allied Domecq at the time.
  • No stamp duty or stamp duty reserve tax is payable on the cancellation scheme because it does not involve a transfer of shares.

2 Intra-group transfer

  • The transfer of the shares in Retail by Allied Domecq to New Allied Domecq will be an intra-group transfer for the purposes of UK tax on capital gains. As a result, the transfer will be treated as taking place for such a consideration that neither a gain nor a loss will arise to Allied Domecq. New Allied Domecq inherits Allied Domecq's historic base cost in retail shares.
  • The transfer should be exempt from stamp duty as an intra-group transfer. Provided that the exemption from stamp duty is obtained, no stamp duty reserve tax is payable

3 Reduction of capital and transfer

  • The court scheme requires the approval of the shareholders by special resolution. The scheme also requires the approval of the court.
  • The reduction of capital does not represent an income distribution. This is because the amount of capital treated as paid up on the New Allied Domecq shares has, in effect, been increased by the insertion of the new holding company. The effect is that the receipt by the Allied Domecq shareholders of new Whitbread shares is treated as a capital receipt, subject to capital gains tax.
  • There are, of course, anti-avoidance rules which are designed to prevent what would have been income receipts being turned into capital. We understand that Inland Revenue clearance was obtained by Allied Domecq so that these provisions would not have applied. This was the case even though the alternative would have been for Allied Domecq to sell its shares in Retail (presumably at a substantial taxable gain) and distribute those proceeds to its shareholders by way of dividend.
  • The reduction of share capital does not represent a capital gains tax disposal or part disposal by the Allied Domecq shareholders of their shares in New Allied Domecq except to the extent that they receive other consideration as part of the reduction of capital. In this case, the Allied Domecq shareholders do receive additional consideration; new Whitbread shares. However, subject to Inland Revenue clearance, a further relief is available which enables the Allied Domecq shareholders to "rollover" gains which would have arisen on the part disposal of New Allied Domecq shares into the new Whitbread shares provided that the proposals are treated as a "scheme of reconstruction or amalgamation".
  • The remaining critical aspect of this structure is that New Allied Domecq is able to transfer the shares in Retail to Whitbread without realizing a gain for tax purposes. Again, a further relief is available under which the shares in Retail are treated as being for such consideration as gives rise to neither a gain nor a loss for New Allied Domecq provided that certain conditions are fulfilled, in particular, the transfer must take place as part of a scheme of reconstruction or amalgamation. Inland Revenue clearance is required.
  • In this case, the transaction should be treated as a scheme of amalgamation. The classic case law definition of a scheme of amalgamation requires (i) a "blending" of two undertakings and (ii) substantial identity between the ownership of the two merged undertakings prior to the amalgamation and the merged entity. These requirements should be satisfied here.
  • Stamp duty/stamp duty reserve tax is payable at 0.5% on the transfer of Retail shares to Whitbread.

B The Punch Proposal

Steps

The Punch proposal adopted large parts of the structure initially proposed by Whitbread. It attempted to replicate the benefits of the Whitbread proposals whilst adding greater flexibility in the form of the consideration which was offered to Allied Domecq shareholders.

The initial steps were essentially the same three steps as involved in the Whitbread proposal except that a new Jersey incorporated company (which was resident for tax purposes in the UK) was the company that acquired the shares in Retail and which issued shares to the Allied Domecq shareholders at step 3. Following these basis steps, Punch Taverns made an offer to acquire the shares in the new company. Details of the steps are set out below.

1 Cancellation scheme

As in the Whitbread proposal, the first step was a Court approved scheme of arrangement under which the shares in Allied Domecq were cancelled and new shares in Allied Domecq issued to New Allied Domecq in consideration for an issue of new shares to former Allied Domecq shareholders.

2 Intra-group transfer

The shares in Retail were transferred to Allied Domecq for a consideration equal to their book value. This amount was left outstanding on inter company account.

3 Reduction of capital and transfer

Under a court approved reduction of capital under section 135 of the Companies Act 1985, the share capital of New Allied Domecq was reduced. New Allied Domecq satisfied its liability to shareholders arising under the reduction of capital by procuring the issue to New Allied Domecq shareholders of shares in a new company incorporated in Jersey, but tax resident in the UK by virtue of management and control ("Newco").

New Allied Domecq and Newco entered into an agreement pursuant to which Newco agreed to purchase the Retail shares in consideration for the issue of Newco shares to New Allied Domecq shareholders.

4 Offer by Punch

Punch then made an offer to acquire the entire issued share capital of Newco for cash with a loan note alternative. The offer was conditional on the previous steps having been completed and on the acceptance of owners of at least 30% of the issued share capital of Newco. The articles of Newco contained provisions which permitted an offeror to compulsory acquire the balance of the share capital if it received acceptances from owners of at least 30% of the share capital.

In the final Punch proposal, New Allied Domecq shareholders received a combined offer for shares in Newco. The combined offer was made by Punch Taverns and Bass Plc. Under the combined offer, Bass agreed to acquire a proportion of the Newco shares in consideration for an amount in cash and an issue of new Bass shares. The additional issues arising from the combined offer are not discussed further in this note.

Issues

1 Cancellation scheme

  • The issues arising in relation to the cancellation scheme are essentially the same as those arising in relation to the cancellation scheme at Step 1 of the Whitbread proposal.

2 Intra-group transfer

  • The issues arising in relation to the intra-group transfer are essentially the same for those arising on the intra-group transfer of Retail shares pursuant to Step 2 of the Whitbread proposal.

3 Reduction of capital and transfer

  • As in relation to the Whitbread proposal, the reduction of capital did not represent an income distribution. This is because the amount of capital treated as paid up on the New Allied Domecq shares for tax purposes is relatively high as a result of the cancellation scheme. Inland Revenue clearance was obtained so that the anti-avoidance provisions which could otherwise have applied did not do so.
  • The Allied Domecq shareholders would have been treated as making a part disposal of their New Allied Domecq shares to the extent that they receive Newco shares pursuant to the reduction of capital unless rollover relief was available. That relief is only available to the extent that the proposals were treated as involving a "scheme of reconstruction or amalgamation". Inland Revenue clearance is required.
  • As in relation to the Whitbread proposal, the shares in Retail can be transferred to Newco without realizing a gain for tax purposes provided that the transfer took place as part of a scheme of reconstruction or amalgamation. Inland Revenue clearance was required and, we understand, obtained.
  • Our understanding is that the proposals were structured to ensure that the transaction would be treated as a scheme of reconstruction. The case law definition of a scheme of reconstruction requires that the transaction must involve the transfer a company's business or undertaking to another company consisting of substantially the same shareholders. This point is discussed further at step 4 below.

4 Offer by Punch

  • New Allied Domecq shareholders were treated as making a disposal of their shares in Newco to the extent that they elected to receive cash pursuant to the Punch offer. The loan note alternative enabled New Allied Domecq shareholders to "rollover" gains arising on the disposal of Newco shares, subject to Inland Revenue clearance which, we understand, was obtained.
  • No stamp duty/stamp duty reserve tax was payable on the transfer of Newco shares because Newco was not incorporated in the UK.
  • The main issue is whether the offer by Punch could impact upon the analysis of the previous steps as involving a scheme of reconstruction. As noted above, for the transaction to involve a scheme of reconstruction, at the end of the scheme substantially the same assets must be held by substantially the same shareholders. In the case of the Punch proposal, this will only be the case if the reduction of capital step itself involved the reconstruction of New Allied Domecq. At that stage, there remained a substantial identity of shareholders in the reconstructed business. (This analysis assumes that Punch's interest in Punch Newco shares at that stage was minimal.)
  • The concern is whether, if at that stage, the subsequent steps were pre-ordained, it is permissible to have regard to that step alone in deciding whether or not there is a scheme of reconstruction or whether it is necessary to have regard to the subsequent steps. If it is necessary to have regard to the subsequent offer, it is clear that there will be no substantial identity of shareholders at the end of the scheme as a whole. The structure of the offer was designed to improve the chances that the reduction of capital steps could be viewed in isolation: the offer was conditional upon completion of the prior steps, and the offer included its own conditions e.g. acceptance by shareholders holding at least 30% of the issued share capital. The 30% threshold can only have been chosen for tax purposes as being a level of acceptance which, whilst not being pre-ordained, could, as a commercial matter be almost guaranteed. Although the case law in this area is not consistent, it would appear that the view was taken that the Inland Revenue would be prepared to accept that the proposals did involve a scheme of reconstruction.

1 Under Section 138 TCGA 1992

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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