Promised you a Miracle - recent case on ER
A recent case about entrepreneurs’ relief is jammed with tedious legal jargon about equitable remedies and the like. Luckily, most of the salient points in Dieno George v HMRC ( UKFTT 0509 (TC)) have already been covered by a number of the greatest 80s popular beat combos.
Promised you a Miracle (Simple Minds, 1982): Mr George, the shareholder, held non-voting shares, which meant no entrepreneurs’ relief, even though he held 5% of the share capital. He and Mr Thornton, another director and a major shareholder, agreed informally that the shares would be enfranchised – so entrepreneurs’ relief would be delivered if a sale happened.
Sign your Name (Across my Heart) (Terence Trent D’Arby, 1987): Sadly, nobody signed their name to anything. The agreement between Messrs George & Thornton wasn’t written down or recorded anywhere and the share rights were only actually changed, by shareholder resolution, in January 2013.
Money for Nothing (Dire Straits, 1985): Even if there had been a written agreement, no consideration had passed, and so no formal contract had been entered into.
Is There Something I Should Know? (Duran Duran, 1983): There was an attempt in the tax tribunal to argue that the agreement to change the share rights was effective earlier than the date of the shareholder resolution (this was the equitable remedy point). However, share right changes require shareholder consent – until the shareholders agreed to the changes, the shares carried no voting rights. Mr Thornton couldn’t just speak for the other shareholders, whatever informal arrangements they may have used in the past.
I Started Something I Couldn’t Finish (The Smiths, 1987): The company was sold in August 2013. Mr George hadn’t held his voting shares for 1 year, which was the relevant period for entrepreneurs’ relief at the time (following the recent budget, it’s been extended to 2 years).
These are all points we see in share schemes arrangements too often: promises made to employees that are never delivered on; non-existent or incorrectly drafted agreements; plans put in place too late for beneficial tax treatment that an employee is expecting. This can result in significant costs for the company, particularly if they’re put in a position when a disgruntled employee seeks damages for unfulfilled promises on a sale, or when an acquirer starts asking detailed questions at the due diligence stage and turns up hidden nasties in the share plan documentation or plan administration.
If you’re not sure that your share plan is set up correctly, get in touch. We can carry out a healthcheck on your existing share plan, whether it is an Enterprise Management Incentive (EMI), a Company Share Option Plan (CSOP), a Growth Share Plan (GSP) or a Share Incentive Plan (SIP), identify corrective action, and help you implement it. Email us on firstname.lastname@example.org or give us a call on 0208 949 5522 and we’ll be happy to help.