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Take-overs & Mergers
One company may wish to take over or merge with another to:
- Enhance its operations or eliminate competition
- Acquire an on-going business rather than start from scratch, because it is cheaper
- Acquire specific assets or brand names owned by the target company
- Acquire the management of the target company
Acceptance of a bid may be recommended by the target company's management where the price is fair and/or they feel it would be to the advantage of shareholders. If the target company's management feel the bid is inappropriate or the price too low, they can take the following action:
- Issue a profit and dividend forecast to persuade shareholders that the company's prospects are so good that either they should reject the bid outright or hold out for a higher price.
- Issue an analysis of the predator company showing its weakness
- Persuade a more acceptable third party (a 'White Knight') to stage a counter-bid, and then recommend its acceptance.
- Bid for another company which the predator company does not want or cannot afford. This is sometimes called a 'Poison Pill'.
When one company takes-over or merges with another company this is typically achieved via a cash or share settlement, or a combination of both. The Capital Gains Tax implications are different depending on the settlment type.
Let us look at some examples:
Cash Settlement
If you are a share holder in a company that is being acquired for a cash settlment, then on take-over your share holding will be sold. After the cash settlement, you will no-longer own shares in the company that was acquired, or the company that acquired your shares. The sale is treated as a normal disposal for Capital Gains Tax purposes.
A shareholder buys 1,000 shares in Company ABC plc @ 100 pence per share.
Cost base for original holding = 1000 x 100p = £1,000
In our example, let us say company XYZ plc takes over ABC plc and in return you receive 200p for each share you hold in ABC plc, your gain would be calculated as:
Acquisition cost = 1000 shares @ 100p = £1,000
Disposal Proceeds = 1000 shares @ 200p = £2,000
Gain = Disposal proceeds - acquisition cost
Gain = £2000 - £1000
Gain = £1,000
To manage a cash settlement in your timetotrade's portfolio you should input the cash settlement in exactly the same way as you would a usual share sale, for more information click here:
Example - Cash Settlement >>
Share Settlement
When two companies merge, shareholders in the company that has been acquired or merged into another, receive new shares in place of their existing holding. In this instance, a merger is not treated as a disposal for Capital Gains Tax purposes but instead the shares in the new company are deemed to have been acquired at the same time and for the same price as the original share holding.
A shareholder buys 1,000 shares in Company ABC @ 100 pence per share.
Cost base for original holding = 1000 x 100p = £1,000
Company ABC plc is merged with Company XYZ plc. Under the terms of the merger you receive 1.5 ordinary shares in Company XYZ plc for every share held in Company ABC plc.
After the merger you will own:
1000 x 1.5 = 1,500 shares in XYZ plc.
Cost base for new holding = £1,000
Average price per share = £1,000/1500 = 67p
To see how you would manage a share settlement using timetotrade's Capital Gains Tax calculator and Share Reorganisation wizard, click here:
Example: Share Settlement >>
Merger Involving Different Classes of Shares
If the acquiring company issues different classes of share it is necessary to apportion the base cost of the new holding between its different components by reference to the market value of the different shares at the date the merger is deemed to have been effected, the "effective date".
The "effective date" differs depending on ether or not any of the shares are quoted on a Stock Exchange within three months or the organisation taking effect.
Quoted shares - you value the different classes of share on the first day when values are quoted for the shares in the reorganisation
Unquoted shares - you wait until you dispose of the shares before splitting the cost. The values you use in the forumla are the values of the shares at the time of disposal.
Using the same example, a shareholder buys 1,000 shares in Company ABC @ 100 pence per share.
Cost base for original holding = 1000 x 100p = £1,000
Company ABC plc is merged with Company XYZ plc. Under the terms of the merger for every share you hold in Company ABC plc you receive 1.5 ordinary shares in Company XYZ plc and 1 XYZ plc B-Share. The market values of each of the shares on the day of the merger is as follows:
XYZ plc ordinary share = 175p
XYZ plc B-Share = 25p
After the merger, for every share held in Company ABC plc, you will own:
1000 x 1.5 = 1,500 ordinary shares in XYZ plc, and
1000 x 1 = 1,000 B-shares in XYZ plc
The combined cost base of the XYZ plc Ordinary shares and the XYZ plc B-Shares is deemed to be the same as the cost base for the original ABC plc holding = £1,000 - which is split between the XYZ plc ordinary shares and the XYZ B-shares in the following proportions:
Proportion attributable to XYZ plc ordinary shares =
market value XYZ Ordinary Shares / (market value XYZ ordrinary shares + market value XYZ B-shares)
XYZ plc ordinary shares = (1,500 x 175p) / [(1,500 x 175p) + (1,000 x 25p)
XYZ plc ordinary shares = £2625/(£2625 + £250)
XYZ plc ordinary shares = 0.913043
Base cost of XYZ plc ordinary shares = 0.913043 x base cost of original ABC plc shares
Base cost of XYZ plc ordinary shares = 0.913043 x £1,000
Base cost of XYZ plc ordinary shares = £913.04
Proportion attributable to XYZ plc B-shares =
market value XYZ B-Shares / (market value XYZ ordrinary shares + market value XYZ B-shares)
XYZ plc B-shares = (1,000 x 25p) / [(1,500 x 175p) + (1,000 x 25p)
XYZ plc B-shares = £250/(£2625 + £250)
XYZ plc B-shares = 0.086957
Base cost of XYZ plc B-shares = 0.086957 x base cost of original ABC plc shares
Base cost of XYZ plc B-shares = 0.086957 x £1,000
Base cost of XYZ plc B-shares = £86.96
To see how you would manage a settlement involving different classes of share using timetotrade's Capital Gains Tax calculator and Share Reorganisation wizard, click here
Example: Settlement Involving Different Classes of Share>>
Share & Cash Settlement
The Capital Gains Tax treatment varies depending on whether the cash settlment received falls under the classification of "large cash" or "small cash".
The cash settlment would be classified as "small" if either it is:
- less than £3,000, or
- it is less than 5% of the market value of your shares in the original company immediately before the merger or take over
If the cash settlement is classified as "small" then the base cost of the original share holding is reduced by the cash amount and the tax liability is deferred until the shares are disposed of.
On the other hand, if the cash is classified as "large cash", then there is deemed to have been a share disposal and as such there is an immediate tax liability. In such an instance, to calculate your tax liability it is necessary to allocate a cost to the cash settlement. The cost is apportioned to the cash received in proportion to: the value of the cash divided by the sum of the value of the cash plus the value of the associated shares, on the effective date of the merger,
ie the cost is allocated in proportion to = (value of the cash settlement) / (value of the cash settlement + market value of the shares received)
Share & Cash Settlement - "Small Cash"
Let us consider the tax implications when the cash received is classified as "small".
Using the same example, a shareholder buys 1,000 shares in Company ABC @ 100 pence per share.
Cost base for original holding = 1000 x 100p = £1,000
Company ABC plc is merged with Company XYZ plc. Under the terms of the merger for every share you hold in Company ABC plc you receive 1.5 ordinary shares in Company XYZ plc and 50p in cash. And let us say that the price of ABC plc shares on the day before the merger is 200p.
Firstly we need to determine if the cash settlement is "small" or "large".
Total cash received = 50p x 1,000 shares
Total cash received = £500
This is less than £3,000 and so the cash settlement can be classed as "small".
So to calculate the base cost of the new XYZ plc shares:
Cost base for original ABC plc holding = £1,000
Cost base for new XYZ plc holding = original ABC plc cost base less cash settlement
Cost base for new XYZ plc holding = £1,000 - £500
Cost base for new XYZ plc holding = £500
After the merger you own 1000 x 1.5 shares in XYZ plc:
Average cost per XYZ plc share = £500 / 1,500 shares
Average cost per XYZ plc share = 33.33p
To see how you would manage a settlement involving both shares and cash settlement using timetotrade's Capital Gains Tax calculator and Share Reorganisation wizard, click here
Example: Share & Small Cash Settlement>>
Share & Cash Settlement - "Large Cash"
Let us consider the tax implications when the cash received is classified as "large".
Amending our example, a shareholder now owns 10,000 shares in Company ABC purchased @ 100 pence per share.
Cost base for original holding of ABC plc shares = 10,000 x 100p = £10,000
Company ABC plc is merged with Company XYZ plc. Under the terms of the merger for every share you hold in Company ABC plc you receive 1.5 ordinary shares in Company XYZ plc and 50p in cash.
The price of ABC plc shares on the day before the merger is 200p
The price of XYZ plc ordinary share on the day of the merger = 175p
Market value of ABC plc share holding the day before the merger = 10,000 x 200p = £20,000
Firstly we need to determine if the cash settlement is "small" or "large".
Total cash received = 50p x 10,000 shares
Total cash received = £5,000
The cash settlement is greater than £3,000 and represents more than 5% of the market value of your ABC plc holding immediately before the merger:
£5000/(£20,000) = 25%
In this instance therefore the cash settlement is classed as "large" and so there will be a gain or loss to declare on the cash received. To work out this gain or loss you need apportion the original cost of the ABC plc shares between the cash received and the shares received We initially paid £10,000 for 10,000 shares in ABC plc. And on merger received:
Cash settlement = £5,000
Number of shares in XYZ plc = 1.5 x 10,000 = 15,000 shares
Market value of XYZ plc share holding on day of merger = 15,000 x 175p = £26,250
The cost apportioned to the cash settlement is calculated as:
cash settlement cost base = Original cost base ABC plc x [(value of cash received)/(value of cash received + market value of XYZ plc received)]
cash settlement cost base = Original cost base ABC plc x [£5,000/(£5,000 + £26,250)]
cash settlement cost base = £10,000 x [0.16]
cash settlement cost base = £1,600
As far as HMRC are concerned you have made a gain from the cash settlement, this is calculated as:
Capital Gain = Cash settlement received - cash settlement cost base
Capital Gain = £5,000 - £1,600
Capital Gain = £3,400
You also own the 15,000 new shares in XYZ plc. The cost apportioned to these new shares is calculated as:
XYZ plc cost base = Original cost base ABC plc x [(market value of value of XYZ plc shares received)/(value of cash received + market value of XYZ plc shares received)]
cash settlement cost base = Original cost base ABC plc x [£26,250/(£5,000 + £26,250)]
XYZ plc cost base = £10,000 x [0.84]
XYZ plc cost base = £8,400
This is the cost base you will go on to use when calculating your future gains or losses on disposal of your XYZ plc share holding.
And the average cost of each share in your XYZ plc holding:
Average cost per share = £26,250 / 15,000 shares
Average cost per share = 175p
To see how you would manage a settlement involving both shares and cash settlement using timetotrade's Capital Gains Tax calculator and Share Reorganisation wizard, click here
Example: Share & Small Cash Settlement>>
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