A share-for-share exchange typically occurs when one company (the ‘predator’) seeks to acquire control over another (the ‘target’). In such a case, the predator offers its own shares or securities to the shareholders of the target company in exchange for their shares in the target. This offer may sometimes include a cash payment in addition to, or as an alternative to, the predator’s shares.
Tax Implications of a Share-for-Share Exchange
Disposal and Capital Gains Tax & Stamp Duty Tax
Without specific provisions, accepting the offer would result in the shareholders of the target company being treated as making a disposal of their shares, which could trigger capital gains tax. This is particularly problematic when the offer consists solely of shares in the predator, leaving shareholders with no monetary consideration to pay the tax liability. In some cases, with share-for-share exchange, Stamp Duty in the UK should also be considered, which would be levied at 0.5% on the transfer only if there is a monetary consideration.
Scheme of Reconstruction
In a scheme of reconstruction, shareholders in the target company may receive shares of another company in place of their holdings in the target, which are then cancelled. Under general rules, this would also be considered a disposal.
No Disposal/No Acquisition Rule
To mitigate these issues, the no disposal/no acquisition rule can apply under certain conditions (TCGA 1992, s. 135(3), 136(2)(b)). This rule ensures that no disposal is deemed to occur for tax purposes, thereby avoiding immediate tax liabilities.
Conditions for No Disposal/No Acquisition Rule of Share-for-Share Exchange
Primary Condition
The primary condition of share-for-share exchange is that the predator company must issue shares or debentures to a person in exchange for shares or debentures in the target company (TCGA 1992, s. 135(1)).
- Debentures: These are regarded as any recognition of debt, such as a loan note redeemable at a future date and are considered securities for capital gains purposes.
Additional Conditions
One of the following conditions must also be met (TCGA 1992, s. 135(2)):
- 25% Test: The predator already holds, or will hold as a result of the transaction, more than 25% of the ordinary share capital of the target.
- Control Test: The predator makes a general offer for the shares in the target with the intention of gaining control.
- Voting Power Test: The predator already holds, or will hold as a result of the transaction, the majority of the voting power in the target.
Overriding Condition
The exchange must be carried out for bona fide commercial reasons and not as part of a tax avoidance scheme (TCGA 1992, s. 135(6)).
Practical Difficulties
The actions of the predator company determine whether the conditions are satisfied, impacting the potential liability of the shareholders in the target company.
Detailed Analysis of the Tests for Share-for-Share Exchange
25% Test
- Ordinary Share Capital: Generally, includes all issued share capital except shares with a fixed-rate dividend.
- Preference Shares: Typically, not ordinary share capital unless they carry additional rights, such as a surplus on winding-up.
- Aggregation of Share Classes: Different classes of ordinary share capital are likely aggregated based on nominal values.
If the predator does not already have a 25% holding, it must achieve this as a direct consequence of the share-for-share exchange.
Control Test
- Control Definition: Ability to exercise or acquire control over a company’s affairs or rights to majority shares/votes, income, or assets.
- General Offer: Must be made to all holders of a particular class of equity or non-voting equity share capital.
The aim is to obtain control, but the relief can apply even if the bid is abortive.
Voting Power Test
- The predator must hold the majority voting power in the target as a result of the exchange.
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Example of Share-for-Share Exchange
Hirst Ltd has the following share structure:
| Shareholder | Nominal Value of Shares | Votes |
| ‘A’ ordinary shares: Alison | 100 | 20 |
| ‘A’ ordinary shares: Brendan | 100 | 20 |
| ‘A’ ordinary shares: Chris | 100 | 20 |
| ‘B’ ordinary shares: Denise | 80 | 160 |
| ‘B’ ordinary shares: Enzo | 20 | 40 |
Rhodes Ltd offers to buy Denise’s shares in exchange for its own shares. After the exchange, Rhodes would hold 61.5% of the votes in Hirst, qualifying Denise for exchange relief under the share-for-share exchange.
Share-for-Share Exchange Conclusion
The share-for-share exchange mechanism involves complex tax implications and conditions. It is crucial for companies and shareholders to understand the detailed rules and conditions under TCGA 1992 to ensure compliance and avoid unexpected tax liabilities. Properly navigating these rules can result in significant tax relief during company acquisitions and reconstructions. We frequently receive requests related to group reorganisation and support for relief, we are expert in find solution that would optimise you group structure. Please feel free to contact us for further information.
