“(a) employment-related securities are disposed of by an associated person so that no associated person is any longer beneficially entitled to them, and (b) the disposal is for consideration which exceeds the market value of the employment-related securities at the time of disposal.” (2) Under s 421B(1) (subject to certain other provisions which are not in point here) “employment-related securities” are: “securities, or an interest in securities, acquired by a person where the right or opportunity to acquire the securities or interest is available by reason of an employment of that person or any other person”. (Emphasis added.) (3). Under s 421B(2): “securities are, or an interest in securities is, acquired at the time when the person acquiring the securities or interest becomes beneficially entitled to those securities or that interest (and not, if different, the time when the securities are, or interest is, conveyed or transferred); and “employment” includes a former or prospective employment. (4). Under s 421B(3): “A right or opportunity to acquire securities or an interest in securities made available by a person’s employer, or by a person connected with a person’s employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless – (a) the person by whom the right or opportunity is made available is an individual, and (b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.” (Emphasis added.)
“The purpose of section 471 is to define the circumstances in which the exercise of a securities option is brought within the charge to income tax instead of being subjected to capital gains tax. The section does so by two methods. First, it provides in subsection (1) a causal test, asking whether the right or opportunity to acquire the securities option “is available by reason of an employment of that person or another person”
“It is not difficult to ascertain the purpose of the deeming provision in s 471(3). The causation questions which can arise under s 471(1) may be difficult and may give rise to disagreement among judges as has occurred in this case. To avoid such difficult questions, sub-s (3) creates a bright line rule: if a person’s employer (or a person connected to that person’s employer) provides the employee the right or opportunity to acquire a securities option, that right or opportunity is conclusively treated as having been made available by reason of the employment of that person (unless sub-ss (a) and (b) apply). This involves a straightforward examination of the agreement or transaction to ascertain who conferred the right or opportunity…” (Emphasis added.)
“Speaking only for myself I do not in the case of this legislation, find the philosophical distinction between a “causa causans” and a “causa sine qua non” helpful. I see no reason why a benefit “derived” from the employment (to use the words of the chapter title) necessarily has to be invested with an intention on the part of the employer to remunerate the employee for the performance of his duties.”
“It seems to me that the words “by reason of” are far wider than the word “therefrom” insection 181(1) of the Income and Corporation Taxes Act 1970 . They are deliberately designed to close the gap in taxability which was left by the House of Lords in Hochstrasser v. Mayes [1960] G AC 376. The words cover cases where the fact of employment is the causa sine qua non of the fringe benefits, that is, where the employee would not have received fringe benefits unless he had been an employee. The fact of employment must be one of the causes of the benefit being provided, but it need not be the sole cause, or even the dominant cause. It is sufficient if the employment was an operative cause in the sense that it was a condition or the benefit being granted…” (Emphasis added.)
“which involves asking the question "what is it that enables the person concerned to enjoy the benefit'?" rather than the causa sine qua non test suggested by Lord Denning. I respectfully agree with Lord Denning and Oliver LJ that the words "by reason of" in s 154 are wider than the word "therefrom" in s 19(1). It also follows that, if one does not apply to s l54 the causa sine qua non test approved by the House of Lords in relation to s 19(1), a causa sine qua non may constitute a "reason" for the provision of a benefit. But I consider, with respect, that the causa sine qua non test suggested by Lord Denning is too wide and could let in a factor in the past which, in ordinary language, would not constitute a "reason" for the provision of the benefit. It is appropriate to recall the warning given by Lord Radcliffe in Hochstrasser v. Mayes, at 391, that, whilst explanations by eminent judges of the meaning of particular words are valuable, they do not displace the words themselves. Neill L.J. gave the same warning in Hamblett v. Godfrey, at 370D, when he said: "...one must never lose sight of the fact that these explanations cannot provide a substitute for the statutory words".”
“…it would not be inappropriate to describe the nature of the rights held by Mr Charman at the time of the share exchange as ‘intimately connected with the employment’, rather than enjoyed in another capacity (see Carnwath J’s comment to that effect in Wilcock v Eve, set out at [83] above, in the context of the emoluments test).”
“When considering the cause of, or the reason for, an event or an act in a particular case, the courts steer clear of involvement in general theories of causation. Instead they apply a mix of general principle, legal policy and good-sense pragmatism to determine whether legal liability in accordance with the conditions set by the relevant rules has been established on the particular facts of the case … All I need say at this point is that the use of “from” in the idea expressed in the statutory expression “earnings from an employment” and “earnings derived from an employment” in a fiscal context indicates, as matter of plain English usage, that there must, in actual fact, be a relevant connection or a link between the payments to the employees and their employment.” (3) At [87] and [88], the UT referred to Patten LJ’s comments in that case. They noted that Patten LJ referred (at [50]) to the need for “a sufficient causal link to be established between the payment and the employment”
“It must follow from this that, in order to satisfy the s 9 test, one must be able to say that the payment is from employment rather than from a non-employment source. This has certainly been the approach of the courts in most of the decided cases, examples of which …… This process of evaluation requires the fact-finding judge to make findings of primary fact based on the evidence as to the reasons and background to the payment and then to apply a judgment as to whether the payment was from the employment rather than from something else …”
“If the employment is a substantial and equal cause of the payment, it becomes open to the judge to say that the statutory test is satisfied. The payment is then from the employment even if it is also substantially attributable to a non-employment cause.” (4) At [95] and [96] the UT concluded as follows on the relationship between the two tests: “Ms Shaw argued that the two tests were materially indistinguishable, citing as support the observations of Carnwath J to that effect in Wilcock v Eve, set out at para [84] above. We do not agree that those observations bear that weight. They are expressed tentatively (‘It may be …’) and in our view it is clear that ‘by reason of employment’ is intended to be and is wider than ‘from’ employment. That was the unequivocal view of all three judges in Wicks v Firth, not only Lord Denning, and Hutton LCJ expressly agreed with those views in Mairs v Haughey (at the passage set out at para [78] above). Doubtless there will be factual situations where, as Carnwath J suggested, the two tests would produce the same result. However, it does not necessarily follow in every case that because something is not received ‘from’ employment it is not acquired ‘by reason of employment’. A degree of caution is therefore required in applying authorities on the former to the latter. As to the meaning of ‘by reason of employment’, the formulation proposed by Oliver LJ in Wicks v Firth is to be preferred to that of Lord Denning in that case. That follows from Wilcock v Eve and Mairs v Haughey (CA).”
“Given that Mr Charman was eligible to participate in the exchange because of his shareholding in Axis Specialty, is it relevant in considering the ‘by reason of employment’ question to take into account the surrounding facts, circumstances and characteristics of the shareholdings and the exchange? Or does one ignore these factors and look no further than the fact that Mr Charman was an Axis Specialty shareholder, and therefore, as Ms Shaw says, must be regarded in the same way as regards his acquisition of Axis Capital shares as any other shareholder?” (2) The UT concluded, at [117], that as: “a binary ‘but for’ test is insufficient, it must be the case that the question of whether the interest in the Axis Capital shares was acquired in pursuance of a right or opportunity arising by reason of employment falls to be considered by reference to all relevant facts and circumstances” (3) Having set out the relevant factors including that the shareholding which enabled Mr Charman to participate in the exchange was acquired by reason of employment, the UT said, at [118], that some factors carried more weight than others in carrying out the necessary evaluative exercise but it was right that that exercise should take relevant factors and circumstances into account in assessing what in substance enabled or was the source of the acquisition of the Axis Capital shares: “Taking those factors into account, it would not be inappropriate to describe the nature of the rights held by Mr Charman at the time of the share exchange as ‘intimately connected with the employment’, rather than enjoyed in another capacity (see Carnwath J’s comment to that effect in Wilcock v Eve, set out at [83] above, in the context of the emoluments test).”
“15. … The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description” (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required. 16. Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material. 17. Likewise, the facts must also be looked at in the round …”
“Subject to the conditions precedent herein contained the parties are desirous that they shall become shareholders in the Company and that the business and affairs of the Company shall be conducted on the basis of this Agreement”
“During the year the company issued£71,000 loan notes to the Directors paying interest at the rate of 3½% above the base rate of Barclays Bank plc. The principal sum is repayable at such time as the shareholders consider sufficient funds are available.£36,000 of these loan notes are convertible into share capital in the Company at the lenders [sic] discretion so that after conversion the lenders will hold 12% of the issued share capital of the Company.”
“It reflected our ambition to drive the company forward and make a success of it”
“not linked to my or Alan’s employment in any way. It was a renegotiation of the terms on which we would invest in the company. In essence, we thought we could, and should, be able to buy the shares more cheaply, based on the performance of the business at that time.”
“It meant that Alan and I acquired our increased shareholding in the company more cheaply. Sauflon still received funding, in the form of our lending, but by funding Sauflon through debt rather than subscribing for new shares we benefited from being loan creditors. The risk taken by a loan creditor is lower than the risk taken by an equity investor.”
“Mr. Wells hereby irrevocably waives all rights to have issued or transferred to him any further shares pursuant to the [1985] Shareholders’ Agreement or the [1988 Shareholders Agreement] and accordingly insofar as the same remain unperformed the provisions of the [1988 Shareholders’ Agreement] as they relate to Mr. Wells’ options will be deemed cancelled and of no further effect.”
“The Company shall maintain in force the “key man” policy referred to in” this provision. (4) As “Executives” under the agreement, Mr Wells and Mr Maynard gave undertakings in relation to the performance of their employment duties and post-employment restrictive covenants pursuant to clause 6.2. It was provided that: “Each of the Executives hereby acknowledges that the foregoing undertakings are part of the consideration afforded to the Investors in return for the Investors agreeing to make subscriptions on the terms hereof …”. (5) As part of the deal, ordinary resolutions of the appellant were passed on20 June 1991 which made the necessary changes to increase its authorised share capital and change the rights attaching to some of the shares. (6) The appellant also adopted new articles of association (“the 1991 Articles”) which (amongst other things) provided (in article 6(D)) for the other shareholders to have the right to buy back the shares held by any employee, director or consultant if they ceased to be such: “If at any time any director or employee of, or consultant to the Company or any subsidiary of the Company shall cease to be a director or employee of, or consultant to the Company or any such subsidiary (for whatever reason) and such person and/or any Relevant Associate(s) of such person shall be (a) Member(s) of the Company, then (unless the holders of 90% of the Shares otherwise agree in writing or the Directors resolve otherwise at the relevant time) there shall be deemed to have been given on the date of such cessation a Mandatory Transfer Notice in respect of all Shares then held by such person and any Relevant Associate(s) of such person.” (Emphasis added.)
“Each of the parties hereby agrees that. (a) the provisions of Article 6(D) of the New Articles shall not apply to Mr Wells or Mr Maynard if the directorship, employment or consultancy of such person is wrongfully terminated by the Company in breach of any relevant service or consultancy agreement; (b) if Mr Maynard ceases to be a director or employee of or consultant to the Company or any subsidiary of the Company for any reason other than the wrongful termination by the Company of any relevant service or consultancy agreement and he and/or any of his Associates is/are (a) member(s) of the Company then notwithstanding the provisions of such Article 6(D) Mr Maynard and his Associates shall be entitled to retain (in aggregate) 18, 000 Ordinary Shares and the provisions of Article 6(D) shall be limited such that a Mandatory Transfer Notice shall be deemed to have been given on the date of such cessation only in respect of such number of Shares then held by Mr Maynard and such Associates as exceeds 18,000 Ordinary Shares; (c) if Mr Wells ceases to be a director or employee of or consultant to the Company or any subsidiary of the Company on or at any time after1st May 1995 for whatever reason and he and/or any of his Associates is/are (a) member(s) of the Company the provisions of such Article 6(D) shall not apply to any Shares then held by him and such Associates,” (d) if Mr Wells ceases to be such a director or employee of or consultant to the Company or any subsidiary of the Company at any time on or before30th April 1995 for any reason other than in circumstances where the Company has properly terminated the Service Agreement under any of Clauses [] (inclusive) and he and/or any of his Associates is/are (a) member(s) of the Company, a Mandatory Transfer Notice shall be deemed to have been given on the date of such cessation in respect of such aggregate number of Shares then held by Mr Wells and such Associates as are set out in the table below.'- Date of Cessation No. of Shares subject to Mandatorv Transfer1st May 1991 -30th April 1992 15,000 1st May /992 -30th April 1993 11,2501st May 1993 -30th April 1994 7,500 1st May /994 -30th April 1995 3,750” (Emphasis added.)
“We saw it as one transaction.”
“It was a negotiation. For example, when I phoned up Quester, Andrew Holmes, who was the lead investor and director said he didn’t need to offer us for the shares, which I felt rather sad about.”
“...to identify aberrations in the price received for employment-related securities and then subject them to tax”
“272 Valuation: general (1) In this Act “market value” in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market. (2) In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.” “273 Unquoted shares and securities (1) The provisions of subsection (3) below shall have effect in any case where, in relation to an asset to which this section applies, there falls to be determined by virtue of section 272(1) the price which the asset might reasonably be expected to fetch on a sale in the open market. (2) The assets to which this section applies are shares and securities which are not listed on a recognised stock exchange at the time as at which their market value for the purposes of tax on chargeable gains falls to be determined. (3) For the purposes of a determination falling within subsection (1) above, it shall be assumed that, in the open market which is postulated for the purposes of that determination, there is available to any prospective purchaser of the asset in question all the information which a prudent prospective purchaser of the asset might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm’s length.”
“(1) The sale is hypothetical. It is assumed that the relevant property is sold on the relevant day (see Duke of Buccleuch v IRC[1967] AC 506 at 543 per Lord Guest). (2) The hypothetical vendor is anonymous and a willing vendor, in other words prepared to sell provided a fair price is obtained (see IRC v Clay[1914] KB 466 at 473, 478). (3) It is assumed that the relevant property has been exposed for sale with such marketing as would have been reasonable (Duke of Buccleuch v IRC at 525B per Lord Reid). (4) All potential purchasers have an equal opportunity to make an offer (Re Lynall[1972] AC 680 at 699B per Lord Morris). (5) The hypothetical purchaser is a reasonably prudent purchaser who has informed himself as to all relevant facts such as the history of the business, its present position and its future prospects (see Findlay’s Trustees v CIR (1938) ATC 437 at 440).”
“A value, ascertained by reference to the amount obtainable in an open market, shews an intention to include every possible purchaser. The market is to be the open market, as distinguished from an offer to a limited class only, such as the members of the family. The market is not necessarily an auction sale. The section means such amount as the land might be expected to realize if offered under conditions enabling every person desirous of purchasing to come in and make an offer, and if proper steps were taken to advertise the property and let all likely purchasers know that the land is in the market for sale…..” (Emphasis added.)
“the best way to determine the value in exchange of any property is to let the price be determined by economic forces - by throwing the sale open to competition when the highest price will be the highest that anyone offers. That implies that there has been adequate publicity or advertisement before the sale, and the nature of the property must determine what is adequate publicity….” (Emphasis added.)
“…it was said that the normal way in which a block of shares in a private company is sold is for the vendor to find a potential purchaser, and then if the directors approve of him they will authorise their accountants to furnish confidential information to an accountant acting for the purchaser who will in the light of his advice make an offer for the shares. On such a sale, no doubt all or nearly all the relevant information, whether confidential or otherwise, will be disclosed to the purchaser's accountant and a higher price will be obtainable than would be the case in the absence of such information…In my opinion, it is the antithesis of a sale in the open market. Only a person or persons selected by the vendor will be able to make an offer. It is, I think, an essential feature of a sale in the open market that persons interested should have an opportunity to purchase, not just those selected by the vendor. This method of selling shares in a private company is not a sale in the open market but one by private treaty.”
“In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time… It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually play no part in the calculation. The inquiry will often focus on what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened.” (Emphasis added.)
“...the so called willing vendor is a person who must sell: he cannot simply call off the sale if he does not like the price…”
“Each will have prepared himself for the sale, the seller by bringing the sale to the attention of all likely purchasers, and honestly giving as much information to them as he was entitled to give (Lynall v I.R.C. [1972] A.C. 680 at p. 694 per Lord Reid) and the buyer by informing himself as much as he can properly do. The statute assumes a sale. That means that however improbable it is that there would ever be a sale of the property in the real world, for example because of restrictions attached to the property, nevertheless the sale must be treated as capable of being completed, the purchaser then holding the property subject to the same restrictions (see I.R.C. v Crossman [1937] A.C. 26). It also means that the vendor, if he is offered the best price reasonably obtainable in the market, cannot be assumed to say that he will not sell because the price is too low as inadequately reflecting some feature of the property nor can the purchaser be assumed to say that he will not buy because the price is too high. Because the market is the open market, the whole world is to be assumed to be free to bid.”
“…I therefore do not understand why it is said to follow from the fact that value has to be ascertained on a hypothesis that any evidence of actual transactions should be ruled out as so irrelevant as to be inadmissible. Whether it is correct to start, as the trustees’ witnesses did, with the accounts of the companies and information available in the public domain, is, in my opinion a question of fact and opinion, not one of law. Similarly, the question whether any weight, and if so how much, is to be attached to evidence of transactions seems to me to be a question of fact and opinion. Some of the transactions on which the Crown relies may be of no use: but there may be others which took place between parties who were genuinely trying to strike an open market value, and I do not see why such cases should simply be ignored...” (Emphasis added.)
“The Act of Parliament requires, however, that the assumed sale, which is to guide the commissioners in estimating the value, is to take place in the open market. Under these circumstances I think that there is no escape from the conclusion that any restrictions which prevent the shares being sold in an open market must be disregarded so far as the assumed sale under section 7(5) of the Act of 1894 is concerned. But, on the other hand, the terms of that subsection do not require or authorise the commissioners to disregard such restrictions in considering the nature and value of the subject which the hypothetical buyer acquires at the assumed sale. Though he is deemed to buy in an open and unrestricted market, he buys a share which, after it is transferred to him, is subject to all the conditions in the articles of association, including the restrictions on the right of transfer, and this circumstance may affect the price which he would be willing to offer” (Emphasis added.)
“[G’s] special rights were peculiar to his position as a director of Group and managing director of Timber Products, as was clearly acknowledged in clause 6.1 of the subscription agreement. His rights were not assignable…These rights would have been personal to [G] even if they had been set out expressly in the new articles…A right can be personal even though it is intrinsic in the sense previously discussed, since class rights can be enjoyed by a class with only one member. Such rights were quite common in the articles of family estate companies formed during the 1930s with a view to saving estate duty.”
“In estimating the market value attention must be focussed on the asset that requires to be valued. In this case it is the rights attached to the shares acquired by the purchaser, no more and no less. I agree with the majority that what has to be considered, to determine their market value for the purposes of the statute, is what the hypothetical purchaser would pay to acquire those rights at the relevant date…Mr Gibson’s right to an enhanced payment had a value to him, but that right was not the subject of the transaction as it did not transmit to the purchaser. What the purchaser acquired and paid for was the rights attached to the shares themselves and nothing else. Mr Gibson’s rights under the subscription agreement between him and the other shareholders who were parties to it were given effect when the transaction was entered into, but for the purposes of section 446X of ITEPA 2003 they must be disregarded.” (Emphasis added.)
“that was, in essence, because of the agreement entered into between him and the other 83.8% shareholders. It was for this reason that the terms agreed with the purchaser extended to how the price was to be divided up between the shareholders. They were designed to give effect to the rights enjoyed by Mr Gibson. But those rights, which were extinguished by the payment which Mr Gibson received, were not part of the assets acquired by the purchaser.”
“It is the terms subject to which the purchaser will take and hold the shares that must be considered. In this case they did not include [G’s] rights under the subscription agreement, as they were extinguished on settlement of the transaction. Their purpose was to enable [G] to enhance the benefits available to him in recognition of his services as managing director of Timber Products. That purpose was served when he received the enhanced share of the consideration that he was entitled to. All the shares in Group that [J] acquired were of equal value to them from and after the date of settlement.” (Emphasis added.)
“including, in their case, having a deep knowledge of PAYE…You don’t need to do that as a full-time job to be able to do your job...Part of their specialty included PAYE, PAYE is quite a broad area. You can have an awareness of PAYE…they were deeply involved and they had the necessary expertise to support me. That’s why we chose a UK team and not just a US team…When you do due diligence, you always use a complement of individuals to support you. Some are strategic, bigger picture, such as Mr Jim Kim and Kathryn Maki, which oversee the entire due diligence. Then you also select people….which have direct expertise in the specific country issues when you deal with a firm like EY, there is a million other people working the background.” (2) He continued that in the “M&A world, you deal with your direct contacts, and their job is to make sure that advice is correct, and they will go within the firm to seek that advice”
“Save as expressly set out in these Articles, the ‘A’ Ordinary Shares and the Ordinary Shares shall each rank pari passu as if all such Shares constituted one class of Share”, and “… in priority to the payment of any amount to or on account of any other class or series of share capital, from time to time, in the Company, the holders of the Preference Shares shall be entitled (equally in all respects pro rata as a class) to an aggregate sum equal to the greater of (i) The aggregate liquidation value; and (ii) The Arrears together with an amount per Preference Share equal to the consideration payable to a holder of an Ordinary Share in respect of such Sale (as adjusted in accordance with Article 3.2(l)”
“we have all agreed to sell the company via Rothschild and all of the shareholders are in agreement with this and many would wish to stay on to see the company to the next stage of its development, something a purchaser would require but which also meets the investors requirements of closing their funds. The bottom line is that I have given you what you asked for in so much as agreeing to employ Rothschild and to sell the company and now I expect you not to stand in the way of something that is exactly the right thing for the company to do when this should only increase the Company’s value. Not going to America will undoubtedly severely damage the company and I am not prepared to accept this. In view of all of the above if we have not closed the US deal with your full approval by Friday 9th November, I will not be selling my shares and will instruct Rothschild (or anyone else) to stand down. My expectations are that we will then regroup, do the USA in a much smaller way with the current management, miss the massive opportunity in front of us but accept that and run the company as we have done for the last 30 years and probably the next 30 years.”
“Alan and myself, as majority shareholders, remain keen to explore potential liquidity events. However, we will not be coerced into entering into a transaction which we do not believe fairly represents the true value of Sauflon and achieves the reasonable objectives of Sauflon’s shareholders. Indeed, for the directors not to pursue the opportunity with SUSA that we now have before us would in our judgement be to fail in their duties as directors to act in the best interests of the company and to delay would limit the company’s value. All Sauflon’s shareholders except you have recognised this and are prepared to facilitate the process. We continue to be committed to driving Sauflon to yet greater successes (as we have done over the last 28 years). Our track record speaks for itself. We see the development of SUSA as simply being another milestone on that journey”
“1. We agree the value attribution of the deal between the executive and investor shareholders upfront and before negotiations take place. This detail should be as originally requested by Rothschild and which was a condition precedent for them to lead a sale process (you will know that we were not a million miles away from that last time so it should be relatively easy). 2. We will appoint Rothschild to handle the negotiations on behalf of all the shareholders and the Company. 3. We will use Peter Dickinson, Mayer Brown, to handle the legal side on behalf of all the shareholders and the Company…. …5. As the offer becomes clear and of course provided it is significantly higher than you would be likely to obtain through the process you have running, we would look for a standstill on any other actions by Prism in respect of its minority interest for a period of 90 days and then review after that.”
“Cleaned out Prism only one investment – Sauflon; Can be sold to avoid pre-emption rights”
“Analyses how can be less friendly to management, which things can be blocked - for examples: cannot form new subsidiaries; no acquisitions, etc. Looks at shareholding structure and analyses how an investor might increase stake; Advises limitation of opportunity to buy out Bond, although says they would prefer to sell offer would have to be limited as Company can buy Bond at 7 x EBITDA; Points to control in hands of Maynard and Wells families; Gives John Carter’s take on views and preferences of current shareholders. Makes clear Prism did not back US venture as believes this will take up more capital than management plan and Prism would not be able to support such requirements. They say their fund closes 7 years from start with hard stop in 9, do not want to be caught out so going for liquidity now. Say management offer would have to be at significant premium to financial institutions, they believe management will try to do deal at 8x EBITDA and sell on at 10x they do not want management to gain that benefit; Advises any investor should think in terms of a 5- year horizon.”
“We do see the 2.5 million transaction fee as a substitute for [Prism] underwriting the US business plan, however, and that is not acceptable for two reasons. 1. It is the US venture proposed and initiated by the company and facilitated by its majority shareholders in the face of [Prism’s] opposition that has brought [CV] to the table; and 2.[Bond] supported the US venture and cannot be expected to pay transaction fees to [Prism]… The structuring document you presented to Jamieson already proposed a compromise on our previous position above an Equity Value of£400m . In the spirit of [Prism] moving their position, however, and as a final offer, we should be prepared to accept the 2.5 million transaction fee allocated as I have described above between Bond and [Prism] up to an enterprise value of£470 million only. Above an enterprise value of 470 million, and with no transaction fee, the Bond and [Prism] investors will see returns on their investments beyond their wildest expectations. Bond paid£630,000 for their equity interest last year and the new [Prism] investors bought into the company at a net equity value of£6 million pounds in 2007 or, for those with us since 1991, at nominal value. All this equity value will has (sic) been created by the executives and executive shareholders of Sauflon. We are simply not prepared to award them back the cost of the US participation in those circumstances. Bond, proportionate to their respective shareholdings, will need to agree to take the same discounts on value as Hollyport.” (Emphasis added.)
“we had a price we wished to achieve, they had a price they wished to receive”. (4) In an email of7 May 2014 between the advisers, it is stated that: “If your client agrees to the above conditions, our Client has agreed to cease their legal proceedings against [Prism].”
“you may never get the opportunity to put it into context and outline the risks to all the shareholders should Prism choose to seek to renegotiate the terms of the deal. We think the key point is to leave John Carter in no doubt that Alan would seek to renegotiate the value apportionment matrix, given the exceptional value being offered if Prism seek to unwind the sums allocated to the forward-looking warranties. Needless to say this would significantly increase the risk of a deal not happening given the recent history with other offers and the tight timetable contemplated by [CV].”
“At the moment Target Net Debt at Exchange is£47 million , the Equity Value in total is£665 million including£107 million for delivery of forward looking covenants, total Enterprise Value£712 million ” and that CV “intend that the£107 million goes to the people who can deliver the matters warranted, i.e. the executive shareholders who will stay on after completion”. (1) Mr Maynard accepted that in this email he did not tell Rothschilds that the£107 million attribution to the “forward−looking warranties” was only introduced in order to enable him to justify to the minority shareholders why there should be the difference in value attribution. It was put to him that he gave his advisors information that he knew to be incorrect. He said he does not think this is incorrect particularly; all it says, in his view, is£107 million goes to “people who can deliver the matters warranted,” and that is correct. He was asked if he meant that CV was willing to go along with this because of the value to them of the executives post-deal. He said he was not sure. He accepted that Rothschilds were reliant on the information that he provided to them to understand what was going on. He added: “To take that on to pick up the negotiation with Prism. Prism hadn’t really responded to the meeting…at that point…I wanted them to go in and negotiate with Prism to a conclusion. So I don’t know whether you call that withholding information. That was the structure of the document that was in front of Prism at that stage.”
“Based on tonight’s call with EY, we anticipate two SPAs (one between the management shareholders and CV and one between Prism, Bond and CV). It has been proposed that there be a gap of a day or so between the signing of the two SPAs. Please note, one change which EY have proposed is the deletion of the forward looking warranties. As you know, these were introduced in order to assist in justifying the non-pro rata allocation of the purchase price. EY believe that in the context of the two separate SPAs, they are no longer necessary (and indeed may look contrived).” (2) Mr Maynard accepted that (a) this restructuring was based on the advice received from EY Sauflon, (b) he, Mr Wells and CV, introduced the “forward-looking warranties” and attribution of£107 million to them and that was contrived between them solely for the purpose of giving him a bargaining position with Prism and Bond, and (c) the final sale agreement did not contain them although Mr Wells did have to give “non-compete undertakings” regarding his sons. (3) As Mr Maynard seemed to accept, it is apparent that EY Sauflon, at some point between30 May 2014 and10 June 2014 changed their advice and advised him and Mr Wells, that the value transfer from the minority to the majority would be taxable as an income transaction. He added: “There you go, talking about ‘value transfer’. A ‘different price’, I would rather say, yes.” (4) Mr Maynard sent to Mr Mike Reade of EY Sauflon the spreadsheets which he had first provided to EY Sauflon on30 May 2014 . It was put to him that EY Sauflon said this in the advice they later gave: “Following the commercial negotiations between the relevant parties, we at present understand that this consideration is intended to be allocated between the shareholders as outlined on the [spreadsheet] provided by John Maynard on10 June 2014 .”
“Agostino – FYI. Were you aware of this? I’ll give Sean a call and update the team when I know more”. (4) Mr Ricupati replied to Ms Cooper as follows: “It was mentioned to me yesterday evening by Randy (our tax counsel); I did not realize that we were already drafting the two SPAs. My understanding is that it is happening for individual tax reasons, hence, the removal of any forward looking statements. Clearly, we need to understand if there are any negative tax consequences for us; I have instructed Tax counsel to make sure that we review the docs before anything is agreed on. Based on your email and what I was told, I don’t think that from a US tax prospective much will change (Jim, Michael, please comment); do you see any overall concerns with what they are proposing?” (5) Ms Cooper responded to Mr Ricupati noting that her understanding was obtained from Mr Finn that (a) as the majority shareholders were to receive more for their shares than the minority, there is a risk that the excess consideration (of around£100 million ) could be taxed as employment income, and (b) the sellers had “therefore requested the two-SPA structure. They consider that this mitigates the risk, as the sellers consider that the higher price for the individuals’ shares is justified by” this structure on the basis that the minority’s shares are subject to a conditional sale, whereas the majority’s sale is unconditional and “the control premium, which is in the shares sold in the second SPA, and the fact that the individual sellers are the ones giving the warranties”
“Sean and I discussed what contractual protection [CV] should have, if HMRC successfully challenged that a portion of the£100m was employment income and taxable in the UK. We discussed the clause in the SPA that makes the vendors liable for any PAYE arising on or before Completion. I also asked whether there was anything in the SPA or Tax Deed…which would prevent us from applying for HMRC clearance post-signing, to get certainty over the treatment before the expiry of the escrow period. Sean thought we might need the vendors’ permission, but agreed that in principle clearance should be possible.”
“You continue to basically get information, processing and digesting information and taking the next steps…we’re at the beginning phase of the due diligence and my major concern at that point was…extra consideration that…the individual shareholders were getting…that was my main focus. The warranties, the two SPAs and stuff, this is all insular information. Here, at this point, we identified it was a risk, and this was the beginning of us reviewing the risk. If the warranty wasn’t removed from the SPA, it went from one SPA to two SPAs. It’s just an analysis on the spectrum of the risk profile of the transaction. You have to look at this from a due diligence perspective, not as every word and every email. My job was to assess the risk, and this is when the risk arose, and from there on you’ll see that we're dealing with the risk and assessing the risk and getting the information. It’s as simple as that.” (7) It was put to him that on11 June 2014 , based on these emails, he knew that the removal of the “forward-looking warranties” and use of two agreements was intended to give the impression of there being separate sets of negotiations and agreements: (a) He said he would not use the word “impression – it was stated that was to mitigate the risk”
“the two SPAs were considered to mitigate risk…I think we’re saying the same thing, I just…the word “impression” has a negative connotation. It’s clearly stated that this “has been considered to mitigate the risk”.” (b) He accepted that at this time he knew that the true position was that in the negotiations for the purchase of the entire share capital of the appellant Mr White had dealt exclusively with Mr Wells and not with any of the other shareholders. He said that he only knew that Mr White negotiated for the purchase of 100% of the appellant and: “everything else is just additional details floating around. To do a due diligence process, you're looking at, "Is there a risk ?", you assess the risk, you use your advisors to get support and you make a conclusion. This is how it works.” (c) He accepted that, as he said in his statement, Mr White dealt exclusively with Mr Wells in the negotiations and not with any other shareholders, and Mr Wells effectively negotiated on behalf of all of the shareholders. He said it was his impression that, after11 June 2014 , Mr White continued to deal exclusively with Mr Wells in the negotiations. He said it was correct to an extent that Mr Wells was still effectively negotiating on behalf of all of the shareholders, including the minority shareholders. He was aware that there were three groups, really, the shareholders, the other majority shareholders and the minority shareholders and it was clear that the negotiation was going on between them. He was not privy to this negotiation. He cannot pinpoint when he formed that impression but thought it was gained from the deal team. In his statement he referred to these as “three alliances of shareholders” throughout the negotiations. He was aware that Mr White negotiated with Mr Wells for the acquisition of the entire share capital. He said that he must have formed this impression from discussions with the deal team and that he had this impression while the dealings were going on. He did not accept that his recollection was incorrect in that there is no evidence of the alliances he referred to. (d) He said he was aware that the two sale and purchase agreements were done for individual tax reasons as proposed by the sellers and their advisers but he was not sure it was done to give HMRC an impression of negotiation. When it was put to him that it is obvious that was the reason, he said he cannot comment. (e) He accepted that he knew, at the time that, contrary to that impression, CV had not entered into two arm’s-length negotiations leading to two different arm’s-length agreements. It was put to him that therefore the two agreements did not reflect the reality of the negotiations that had in fact taken place. He said that it depends to which negotiation one was referring. CV negotiated “with Sauflon as a whole”
“it was irrelevant if there was one, two, three or four SPAs. We just want to buy 100 per cent of the company.”
“In order to help you close this matter, we bring the following to your attention. The two separate agreements 1. The Cooper Companies, Inc (“TCC”) and CooperVision (UK) Limited (“CVHL” an indirect subsidiary of TCC who acquired the share capital of SPL) negotiated a separate agreement with Mr Wells, Mr, Maynard, Mrs Maynard and various other members of the management team (the “Majority Shareholders”) and the Private Equity shareholders (the “Minority Shareholders”). 2. The result of these two arm’s length negotiations led to two different arm’s length transactions: a. The sale to TCC by the Minority Shareholders of their shares concluded at 11:52pm on30th June 2014 ; followed by b. The sale to TCC by the Majority Shareholders of their shares at 12:01am on1st July 2014 . 3. The agreement reached between TCC and the Minority Shareholders was not contingent upon an agreement being reached with the Majority Shareholders. In effect, both TCC and the Majority Shareholders took a risk that a transaction with them would not be executed and TCC would end up being a minority holder in SPL. 4. The Minority Shareholders had no contractual or informal obligation to the Majority Shareholders and therefore no reason to do anything other than seek to maximise their own return from their own holding.” (Emphasis added.)
“That’s the result of the SPA and the closed deal. At the end, this is what happened…It’s just language…how things are expressed. Basically all we're trying to say is that there was two SPAs...I did not write this response...I relied on Mr Jackson and the advisors. Again, at the end of the negotiations, there was two SPAs that were drafted between the Cooper Company and the combined Sauflon…It depends how you look at this. The negotiations were among Sauflon, and we were indirectly part of the negotiation. It doesn’t mean we negotiated directly with the minority shareholders but we are party to the transaction, so whatever was decided becomes part of our process and our documentation…At the end of the day, there was two SPAs that the parties agreed to…No, there was negotiation. Mr Wells and Mr Maynard, they negotiated with the private equity on the deal. So, this just captures the outcome of the results…This is just how it’s written…It basically says that there was two SPAs: one between TCC and the minority shoulders and one, the majority shareholders. That’s what it states and that’s what it means to say…at the end of the day, there was negotiations…within the parties and this is capturing the negotiation. If it was TCC negotiating directly with minority shareholders or the majority with the minority, at the end of the day the result is what it says in here, are two SPAs, one between TCC and majority shareholders. That’s basically what the documentation shows and that's what happened. This is just the way the statement is written.”
“As you will know from Graeme Ward at Latham, until last week, the advice I was receiving from my tax advisers Ernst & Young, was that the transaction structure would enable me to receive my entire share of the consideration as a capital transaction (which, because I have been resident in Jersey for a couple of years now, means on a tax free basis). At the very last minute, frustratingly, EY became concerned that under the original deal structure, there was a risk that the difference in value between the price per share paid to the private equity shareholders and the price per share to be paid to the management shareholders could be treated as an income transaction. As a consequence of this, we have had to develop the structure with two sale and purchase agreements (one between CV and the private equity and one between CV and the management shareholders)…”
“As we’ve discussed when you first approached me to purchase Sauflon, as you know I had no intention of selling…I decided that if I could achieve a certain net figure and that all of the other conditions were right then it would be worth considering. From that time John and I have worked diligently to achieve that objective. First with yourself and with your help we achieved the figure we needed related to the selling price. Then followed some extremely difficult discussions and negotiations with the minority, non-working shareholders (you know the history of these people and how they came to be involved). From previous potential deals we always knew that they would reluctantly be open to a shift in value between us for all the reasons we have previously discussed. Finally we have got to where we need to be with them and what was and is required for us to hit our minimum selling target and therefore the net rewards we have earned for 30 years hard labour. I have to say this has been no mean achievement and has taken enormous effort to get it to where it needs to be. Now, the tax risk which is now inherent in the deal means that I cannot now be sure that I can achieve that certain net figure.”
“i. if you sell your shares for more than "market value" (as that term is defined in the tax legislation) you may be subject to income tax and NICs on the excess; ii. you will argue that the price is "market value" as this is a price freely negotiated in an arm’s length transaction; iii. we consider the above to be a strong argument and we have worked with Peter and you to structure the transaction to support it (in particular, we now have 2 sale contracts and the actual position is much more compatible with the argument that there is no value flowing from the PE houses to you but rather your having stated to the purchaser the consideration you require if the sale is to proceed;) iv. EY will provide a letter to Sauflon to the effect that the actual sale consideration received by you is the “best reasonable estimate” of market value; v. Given the size of the aggregate transaction, you should proceed on the assumption that HMRC can be expected to examine it closely. One possible area of challenge is that the sale proceeds have not been allocated amongst the vendors on a pro-rata basis (you are selling your shares for a higher price per share than the PE houses); vi. While we have experience of HMRC accepting sales as being at market value where the sale proceeds are not received pro-rata, as we (and Mayer Brown) have explained the difference in this case is “aggressive” and we are not aware of a precedent case in line with the differences you have negotiated. The differentials may encourage HMRC to press a case that the allocation is in excess of “market value”; vii. Should they do so, we will argue strongly that this was a freely negotiated arm’s length transaction and that what you received was market value. While we anticipate that our arguments will be successful, we cannot guarantee such an outcome. viii. While any challenge is likely to depend on the interpretation of “market value” you may also have the founder’s argument…. ix. In conclusion, having reviewed the position in depth and in light of the commercial factors, we consider that the transaction is now structured in such a manner as to give you optimum protection given the commercial parameters and a credible case to establish that your sale is at market value.” (Emphasis added.)
“To the extent that this Memorandum is shown to, or seen by, any other party, EY owe no duty of care to such party and they may not rely on this Memorandum”. (2) In the “Background” section the memo included this: “Following commercial negotiations between the relevant parties, we at present understand that this consideration is intended to be allocated between the shareholders as outlined on the “counter offer” tab of the Exec Value Allocation spreadsheet provided by John Maynard on10th June 2014 . We note that this allocation represents a departure from a pro rata allocation of the consideration and follows lengthy and complex negotiations between the parties. We note that CSP Prism LP and Bond Capital Partners I Ltd (together, the “PE Sellers ”) are not to provide any warranties or guarantees as part of the sale process. As the proposed allocation of consideration results in additional value (vis a vis a pro-rata, share) being realised by certain shareholders, there is a possibility that HMRC might seek to apply certain income-tax charges provided within [ITEPA].”
“…we consider (based on our understanding of the factual position) that there is a tenable view that the “market price” is in fact the actual consideration paid to each shareholder. On this basis, EY will provide to the Company a letter to the effect that the sale consideration is genuinely its best reasonable estimate of the value of the shares. On this basis, in our opinion, the Company should not be required to operate PAYE and therefore should not be at risk to interest, penalties or NIC should HMRC subsequently establish that the value of the shares was higher than the Company’s estimate. HMRC may challenge the position and open an enquiry into the value of the shares. If they do so they may seek to argue that the market value of the individual shareholders’ shares was in fact the pro rata value. Any tax will then be collected from the individual vendors through self-assessment. The proposed modification to the deal structure (being the execution of two separate SPAs) should enhance the arguments that market value for tax purposes is the price actually received. In summary, we consider that there are persuasive arguments that the figure negotiated between the parties is market value for these purposes and will so argue if HMRC challenge the position. We cannot, however, guarantee that HMRC will not successfully sustain a challenge” (Emphasis added.)
“…it is necessary to establish the "market value" of the securities being sold. Market value is determined in accordance with s.272 TCGA 1992 and broadly summarised is as follows: Open market value is assessed based on the concept of a sale of shares by a hypothetical willing vendor to a hypothetical willing purchaser, both of whom are in possession of all the information that might reasonably be required in a sale of such shares by private treaty and at arm's length. On the basis that a hypothetical buyer of the Majority Sellers’ shares would be able to negotiate the same commercial agreement with the PE Sellers, there is an argument that the proposed reallocated consideration represents market value for these purposes. However, this position is not without risk, and whilst our understanding is that the reallocated consideration does represent a commercial deal freely negotiated between unconnected parties, HMRC could challenge the position on the basis that a hypothetical buyer would not be able to achieve the same deal….. We believe that it is possible for the individual shareholders to advance the argument that the price they received for their shares is market value and have seen this approach accepted in the past. However, this will be regarded by HMRC as a high profile transaction. Further, the consideration and the difference between the price per share received by the different classes of shareholders are both significant. As such, we think there is a significant risk HMRC will enquire into the valuation. In the event they did, their starting point is likely to be that market value should be calculated on a price per share (pro rata) basis”. (Emphasis added.) (5) At the start of that section, they said that the factual position will be critical if the actual sale price is to be accepted by HMRC as market value. (6) In a section headed “Revised Structure”, having summarised the two agreements structure, EY Sauflon said: “It is our understanding that the terms of the PE Sellers’ SPA will include; the agreed consideration for these shareholdings only, a warranty to Title only and two conditions that will be met before completion can take place. The conditions will be that the individual shareholders sign their SPA within 5 days and that the individual shareholder SPA is completed (i.e. commercial conditions are met). The terms of the individual shareholders’ SPA will include the agreed consideration for these shareholdings only, details of warranties and indemnities to be provided by the Majority Sellers and the commercial conditions that will be met before completion can take place. This approach should, in our opinion, substantiate the different price per share consideration that has been commercially negotiated for the two different groups of vendor. From a tax perspective, we believe that it would be helpful if the two SPAs were independent of each other, i.e. not inter-conditional. That said, we recognise the Purchasers objective to acquire 100% of the shares and therefore understand that the PE Sellers’ SPA will need to be conditional on the completion of the individual sellers’ SPA. From a valuation perspective, it is our opinion, that this approach strengthens the argument that the Majority Sellers are receiving consideration not exceeding market value. That said, we note that there will remain a differential between the price received by Majority Sellers and the price received by other individual shareholders.” (Emphasis added)
“EY has provided to the company a letter, a copy of which is annexed to this report, confirming that, in our opinion, the company can proceed on the basis that the price stated in the sale and purchase agreement constitutes a best reasonable estimate of market value. If HMRC were successful in overturning the “best estimate” letter (which we consider a remote risk) and establish that this did not reasonably reflect market value they would likely then contend that the PAYE/NIC mechanism should have been operated. HMRC would then seek to recover the PAYE/NIC from the employer together with interest on the unpaid tax and NIC and penalties…” (Emphasis added.)
“Over recent months AW and JM have had detailed discussions with the Purchaser and agreed an indicative price at which the Majority Sellers would sell their shares (c.£430m ). They have also been notified of the indicative aggregate price the Purchaser would be willing to pay to acquire 100% of the Company (c.£650m ). It is likely that the Purchaser would only wish to undertake a transaction to acquire 100% of the Company (e.g. it would not acquire the Majority Sellers or the PE Sellers shareholdings in isolation). To date, PE Sellers have had no contact with the Purchaser. However, AW and JM have discussed the proposed transaction with the PE Sellers and established an indicative price at which the PE Sellers would sell their shares (c.£200m in aggregate). It has been agreed that the PE Sellers would provide no warranties or guarantees (except to title) in connection with the proposed transaction. The Majority Sellers will provide all warranties (with the exception of title in respect of PE Sellers shares) and indemnities as part of the transaction. It is understood that there would be limited commercial appetite for a sale by Majority Sellers to the PE Sellers (even if this was conditional on a subsequent sale to the Purchaser). It is understood that PE Sellers might be willing to sell to Majority Sellers (but this has not been explored with the PE Sellers at present). PE Sellers have confirmed that they might be willing to amend the Company’s Articles to reflect a commercially agreed allocation of aggregate sale consideration but they would require an indemnity against any potential PAYE/NIC obligations that might arise as a result (if the transaction did not subsequently complete). They would also expect all shareholders to have a legal right to require the articles be reinstated if the transaction is not completed within a certain timeframe.” (Emphasis added.)
“In light of the uncertainty arising from the employment related securities legislation and the consequential risk of tax charges as discussed above, a number of alternative approaches have been discussed with Mr Wells, Mr Maynard and Mayer Brown”
“From a tax perspective, we are of the opinion that this approach is helpful to an argument that the price received by the individual shareholders is market value for tax purposes as it captures the commercially agreed price at which the Majority Shareholders will sell their shares (which, based on the proposed aggregate consideration, is a departure from the provisions of the Company’s Articles). However, we note that this approach does not remove the risk of an income tax charge entirely. In particular, where there will remain a differential between the price received by Majority Sellers and the price received by other individual shareholders. Consideration has been given as to whether the introduction of a third SPA for individual shareholders other than the Majority Sellers would be helpful but this was not considered materially helpful and might give rise to other commercial/legal challenges. Ideally, from a tax perspective, we would prefer that the respective SPAs were not conditional on one another but appreciate that this is not commercially viable. From a commercial/legal perspective, we understand that this approach should prove to be the least challenging to implement.” (Emphasis added.)
“…the risk that if HMRC were to review the position and request information from the PE sellers, their responses may not be entirely helpful given relations between the parties.”
“If it was contrived, I wonder how we would have taken it out in the final agreement, without the advice from [EY], of course, but I would have said that we put it forward originally with a view to it being a serious part of the negotiations with private equity”
“the fundamental point I took away from [the memo] was that PAYE did not need to be operated because the proceeds that Sauflon’s shareholders were to receive were the best estimate of market value, which meant there was no ‘excess’ which would trigger any PAYE obligations. That was consistent with my knowledge of the negotiations.”
“We sought our own advice, and we did our own due diligence, and we conclude the same thing”
“point somewhere where they say that the advice that they provided was wrong. They’re just issuing warnings as any firm would do. No one is going to go out there and tell you that any type of transaction is risk free. They’re just telling you that this might be seen as aggressive. In the same email, they’re telling Mr Wells and Maynard that their position is clear, that the actual sale consideration we have received is the best reasonable estimate of market value.” (6) He said in effect that this comment would not have set alarm bells ringing or made him more cautious if he had been aware of it because he was relying on the memo and the valuation letter. He did not think this comment changes the advice/ the outcome. He accepted that if he had asked for all advice that had been received on the PAYE issue, the sellers might have refused and he would have known that he was not seeing the full advice or they would have provided this email and he would have seen that both EY and MB had advised previously and were reiterating this comment. He said again this would not have changed his opinion, thoughts or processes or mean he would have done things differently; this was just to make sure that the sellers were aware of the risk and, in his view, it does not change the outcome of the opinion. He said: “The advice was clear. It’s a market value transaction. If the difference is aggressive or less aggressive or stuff, it’s irrelevant…We critiqued the language on the opinion letter to make sure that E&Y was comfortable with their advice, and…the firm agreed with their advice, that it was solid, and it basically said in -the final letter…that was the best reasonable estimate” (Emphasis added.)
“if you look at the entire memo, it’s kind of self -standing. As a background, it tells you that there was a negotiation between the parties, and that basically the proposal...could give rise to potential risk of income tax. Then it goes through…the summary. So, when I read this, I'm not going back to the week before, two weeks before…We all know what the prior correspondence is. This is basically a memo that summarises what has transpired up to date, the double SPA structure and the summary of the risks associated with the transaction and their recommendation.”
“When I review a technical memo, I review the memo and what it’s opining on, and if you read this memo, adjust the revised structure and the consequences of the structure. There’s no way that it requires to go back and compare to the prior structure and the change in structure. That’s a totally different prerogative. This is a memo that says, “As of today, there is two SPAs and here is the recommendation that E&Y is providing.”
“There is only one fact that you needed to know…Was this a market value transaction, and was this basically a deal between unconnected parties that basically agreed to a price?”
“We only want to acquire 100 per cent of the company. You’re conflating the two things. This is a different statement. This is basically referring to the negotiation among the shareholders of Sauflon.” (Emphasis added.)
“Cooper company negotiated the purchase of 100 per cent of the shares of Sauflon. Within Sauflon, there was internal negotiations to decide who gets what. That’s as simple as that. So this is based on the existence of those two sets of negotiation.” (Emphasis added.)
“Did the other shareholders accept the price? Yes, so that’s evidence of a negotiation. Why would the other remaining five shareholders, majority shareholders, accept our price? So, at one point or another, it’s clear that they agreed to the price and negotiation between the majority shareholders…must have happened, and those guys accepted the price they were getting. So it is clear that the price was not imposed to them. They’re part of the negotiation and they agreed to take a lower share than the other majority shareholders. It’s a fact. They agreed and they got paid for what they agreed to. So, you're trying to link a direct negotiation from Cooper to every set of shareholders. Again, the Cooper Company was interested in buying 100 per cent of the company, of Sauflon. How the pie was divided among the shareholders was their doing, their negotiation. It had nothing to do with us. We just want 100 per cent of the company. I don't care if I paid you$10 or him 5, I just want to buy the company. So, you're looking for something that doesn't exist and nor is it necessary. You're trying to look for negotiation from the corporate company with all the A shareholders. That is not needed, no, that does (sic) exist. We bought 100 per cent of Sauflon, and the Sauflon shareholders negotiate among themselves how to divide the proceeds….” (Emphasis added.)
“This is just how a technical memorandum is written. You highlight any potential hypothetical risk.” (18) It was put to him that in the technical analysis EY Sauflon did not provide any explanation of the “credible” case they referred to. He suggested there was no need for them to explain what the basis was. He said that the final memo was accompanied by the valuation letter and that letter: “clearly states that this is the best estimate of market value, with none of these alerts or disclaimers or risk profile. On the other hand this is an analysis. When you do an analysis in a technical memo, you cover all hypothetical risks irrespective if the risk is remote…from a legal perspective, they cover themselves by pointing out all potential risks irrespective of the likelihood of the risk…to materialise…It doesn’t mean that [EY Sauflon] doesn’t believe in our opinion, this is how technical memos are written and, again, this is why I was asking if you were giving tax advice earlier.” (19) He did not accept that the introduction of the two agreements structure was a key factor in EY Sauflon giving this advice. It was put to him that the reference to a remote risk has to be read in the context of what EY Sauflon said before, and also the fact that, as he knew, the agreements did not reflect the reality of the negotiations that were taking place with CV. He said: “How do you read the remote risk in connection to the prior statement? Where does it say that? That’s your opinion again…It doesn’t say it. The risk is remote.”
“I do not like how the opinion is expressed - ‘it is possible to argue on a reasonable best estimate basis…’ Aren’t we seeking opinion that in EY’s opinion the price paid for the shares is a reasonable best estimate of their MV for UK tax purposes.” (3) Mr Ricupati replied: “I totally agree with you; the statement defeats the purpose of the letter.”
“it is possible to argue on a best estimate basis that the Gross Consideration payable to [Mr Wells and Mr and Mrs Maynard] for their holdings of the Ordinary Shares is not more than the open market value for UK tax purposes.”
“1. If we are to go with option 1) outlined in the EY paper we need a robust opinion from EY. I am sure you agree that this is a reasonable request in the circumstances. For example, I do not think it is sufficient to say “it is possible to argue on a reasonable best estimate basis that the gross consideration payable to the majority sellers is not more than the open market value for UK tax purposes”
“As you know, we’ve not been party to the discussions relating to these figures.”
“one other thing I would highlight is that I believe we agreed on a subsequent call that proceeds would not be specifically attributable to the forward-looking warranties etc., presumably a total gross consideration figure will be shown for each in the SPA, rather than a breakdown of how these numbers were agreed. Therefore, it may be sensible to simply share the agreed allocation spreadsheet which has the headline numbers only.”
“Again, you are now familiar with the language of technical memorandums and opinion. You’re sitting here, picking apart one word in the context of the entire letter…EY came out and said, “This is the best estimate, therefore you don’t need to operate PAYE.”
“We have established that there was a negotiation between the corporate company and the shareholders. You keep separating the majority versus the other individual shareholders from the company perspective that this is irrelevant. So, when the statement said that the negotiation with individual shareholders is taken in an umbrella view that if, in reality, the negotiation was two or three of them, it’s not relevant.” (6) He accepted, in effect, that the only negotiation that CV had was for the entire share capital of the company. He said that was the ultimate goal, to acquire 100% of the company and “we were looking to acquire 100% of the company.”
“again, even separating the remaining of the individual shareholders versus the majority shareholders, they’re still shareholders of the company. Again, the language used in things are more generic...The Cooper company negotiated with Mr Wells and the rest of the individual shareholders in one fashion or another. Everyone agreed to the price and that was the outcome of the negotiation and the deal. So, if you want to say that they negotiated with shareholder A, B and C, that’s your prerogative.”
“I already told you it’s in the review.” (7) It was put to him that EY Sauflon viewed the fact that only the majority shareholders were to give warranties as a key factor justifying the difference in price but, as he knew, those warranties were very limited following the removal of the “forward looking warranties”
“that’s irrelevant…to the analysis and to the conclusion…the memo looks at the fact that certain shareholders received more than the pro-rata shares, and it…opines on that. If it is five of them, two of them or four of them will receive more, it doesn’t change the fact that this is a market value transaction and a negotiation within a connected body are like transactions...We have established that the memo is not looking at individual shareholders. It’s looking at is there some shareholders who receive more? −yes. Is there a…risk issue? It was discussed, assessed and concluded.” (8) He accepted that (a) he was aware that the individuals were also to receive significantly in excess of the price per share that the minority shareholders were to receive and in this part of the negotiation they gave up some value, and (b) previously the “forward-looking warranties” had been put forward to justify the£107 million excess. It was put to him that clearly it was not felt that the other warranties justified that difference in price; under the original structure there was no attribution of any of the£107 million to the other standard warranties. He said the “forward-looking warranties” were specific to certain tasks and milestones that the company was supposed to achieve and the attribution of value to them does not mean that the other warranties did not have value. It was put to him that if standard warranties were considered as justification for the price allocation, there would have been no need for the “forward−looking warranties” and attribution of the full£107 million to them. He said there was a change in strategy; those were dropped and the two agreements approach was taken. This memo advises on that strategy and not on the prior one: “Here’s two SPAs, here’s the factors that you have read, and here’s their opinion. Their opinion is that this constitutes a market value transaction and the price paid was the best reasonable estimate. You’re linking it, this current analysis, to prior facts, but they’re no longer relevant.” (9) It was put to him that it is clear that EY Sauflon, Mr Wells and Mr White were of the view, as he knew, that the standard warranties and escrow did not justify the price difference and, and that is why they had introduced the “forward−looking warranties”
“So, I think you have lost the sense of reality. This is a deal where a US multinational paid£665 million to acquire this company, and one of the…due diligence components, out of the hundreds of due diligence items that came up out of this, was this PAYE issue. EY provide advice, we follow, and that’s it. It’s very simple when you stop looking at every little word and detail to understand. So, the EY advice is clear…Here, it says that…according with the best estimate, a reasonably made PAYE income in respect to the purchase price is nil - simple. Clear and to the point - nil, nil, zero.” (10) It was put to him that his view seemed to be that it did not matter if the key factors that EY identified as the basis of their opinion do not stand up to critical scrutiny. He did not really answer this. He said: “That’s your opinion again. I’ve never agreed to that and that’s what you’re saying…”
“No, I didn’t know directly. You weren’t in my shoes when I did this. So, you want me to accept your opinion as mine. I’m just a little bit puzzled.” (11) In his witness statement he said that the advice from EY Sauflon was “based upon a view on market value that he understood and agreed with based upon his knowledge of the negotiations”
“Apparently, he remains very unsettled with the strength of his EY advice which he reiterated to Al again today…Is there any way we can provide him some comfort on his tax condition through you and MB… However, in talking with Agostino, the Chapter 3D, Part 7 risk is probably the most concerning because Alan’s Jersey residence is not a safe harbor. It appears thought that that part of the tax code is the least likely to be triggered as it was meant for stop-loss situations. Plus, to challenge the individuals’ position of receipt of “open market value,” the HMRC would have to argue that the individual sellers’ negotiations with the institutional investors, not those with us, were not arms-length. From our view, the negotiations Alan had with the institutions were hard fought and the parties strongly dislike each other. This would seem to demonstrate fair value at arm’s-length.
“What is your realistic view on Mr. Wells’s exposure?”
“I think there is a medium level risk for him – I would not put it lower than that. I’m not sure how that equates in percentage terms, but less than 50pc but at least a 20pc risk I would suggest I spoke further with MB earlier this afternoon. There is no suggestion coming from anyone that things could be done any better and although Alan appears to be waivering on this the latest intel I have is that he appears to be satisfied that all that can be done has been done. (2) Mr Ricupati replied: “Forgot to mention that I had told Randy that the risk was around 30%, glad to see that you are on the same page.”
“…extremely late tax advice from our tax advisors has added to my frustration and concerns. This in turn has meant that the minimum target I set myself (in terms of money for the business) has been gradually chipped away… I do need your help in addressing the risk balance…I understand that part of the requirement is that [EY] send CV a letter relating to a particular tax issue and that letter has stated that in their opinion no PAYE is due to the IR. John and myself in turn are required to give tax warranties that in the most unlikely event (judging by the letter and [EY’s] advice) tax is due that we will pick up any PAYE tax due. That is the one area where the risk is too imbalanced and therefore in order to complete the deal we need to address it…”
“It was Alan exercising ultra-caution, as far as I was concerned.”
“…Greg has asked me to summarise...and quantify the Employment Tax issue...that is causing Target’s shareholders to ask for further reassurances. The majority shareholders are individuals who reside in the UK except Mr Wells who moved his residence to Jersey a few years ago in anticipation of a possible divesture of his investment. In light of that, it would be reasonable to assume that Mr Wells is seeking to fully escape UK taxation… Target engaged E&Y to prepare a technical memo and also to provide a letter (to TCC) stating that it believes that the value attributed to the shares of the key shareholders is based on an open market valuation and that it should not be tied to past employment or future conditions. However, the memo concludes that there is only a “tenable” position that market price was paid to the shareholders, hence, PAYE should not apply. Clearly, “Tenable” (able to be maintained or defended against attack or objection) is not a strong endorsement of the conclusion reached, but this matter is fairly complex for any firm to provide a higher level of assurance… [He set out a summary of the risks with quantification which seems to be based on what he had received from Ms Cooper.] …If we cannot agree with Target on what the best protection mechanism is, we could potentially seek HRMC clearance on this issue and bring certainty to both sides. Clearly, in doing so, we are increasing the risk of paying such taxes but it is a risk that it is out there already. It is hard to speculate in regards to the risk level, the detection risk is probably lower than 50% but higher than 20%. Those percentages are pure speculations and should only be considered as such.”
“We were just looking at the risk profile of the transaction. If you want to call it detection risk, it’s not at this point we were dealing with this and we were trying to understand what the potential exposure was to Mr Wells and the Maynards because they were asking for an indemnity letter and our job was to understand their concern, assess it and quantify the exposure.” (3) Mr Golden then said: “We are trying to get as much colour as we can on the likelihood not just of HMRC challenge but of reversal of the capital gains tax treatment by Alan and Maynard” and: “Obviously, this presents a big, new wrinkle we need to address and throws everything uncertain again.” (4) Mr Ricupati accepted that Mr Golden plainly wanted to know the merits of the market value argument. It was put to him that Mr Golden was asking him to revisit the PAYE tax issue. He said this is an email at a point in time, they continued to review the PAYE issue and to assess the level of exposure, to understand the multiple scenarios and that was the momentum. This was not the end of the diligence process. At this point the concern was raised and it was addressed in the following days and weeks. They continued to review the advice and the quantification of the risk. In light of the overall evidence, we do not accept that Mr Ricupati and his advisers carried out any substantive analysis as regards the PAYE issue whether in this period or otherwise. (5) He accepted that at this point there was a concern that it could jeopardise the deal if CV did not agree to indemnity as Mr Wells might start speaking to other potential buyers. He said for CV this was another item of due diligence that they need to investigate and assess in a commercial transaction to see if it was worth taking this risk. That is what they did at the time - on the basis of the opinion of EY Sauflon that PAYE was not applicable. He seemed to accept that he and CV were under pressure to close the deal quickly given the concern about Mr Wells. He said: “That is a risk in all acquisitions. You close the deal as soon as you can to make sure that the deal is closed. That is pretty standard practice in the commercial negotiation of deals. You just try to close as soon as possible. We were all ready to send documents. This kind of reopened the door but we took our time to identify the issue, quantify, communicate to management in the commercial organisation if they want to take the risk…we took our own time to do that. And when we did, then we communicated and the deal closed. So if you want to say we were under pressure, that is your opinion. We continued our process as a normal due diligence process.”
“In regards to the likelihood of Mr Wells to be liable; we need to go back to the employment specialists and ask a frank opinion. I will take the E&Y side if you want to tackle the Latham side”
“I reviewed the opinion, I addressed the developing facts, such as the request for certain items, I went back to the adviser discussed it, we quantified and then we concluded that the opinion stands and we move forward”. (2) He did not accept that given the increased financial risk to CV he did not feel able simply to rely on the valuation letter and/or memo. It was put to him that in fact he did not raise any further questions or seek any further clarification from EY Sauflon. He said he did not recall exactly what he did on the day. They went back to EY and it was discussed and the final letter was issued with the language that made sense. So, this event is mainly a quantification exercise because “we owed a responsibility to management and the board that if we have taken on a risk, we need to understand what the risk is…”
“DRAFT worst−case exposure ... based on the allocation of consideration circulated on 19 [June]... assuming the whole amount is NIC and PAYEable for Alan Wells and the Maynards (the other individuals are actually receiving less for their shares than on a strict pro rata basis now) ... Please note that the columns from J inwards haven’t been reviewed by anyone yet, but I am sharing my draft with you in the interests of time. I’m also trying to get hold of our employment tax specialists to get a steer on the likely level of risk.” (Emphasis added.)
“….we have calculated a most likely exposure amount of£45m (including penalties at 30%) and a 'worst case' of£81m (excluding penalties). This is significantly more than the...35.9m we estimated last week, for the following reasons: At the time we calculated the$35.9m , we hadn’t seen the allocation of consideration - we assumed that all individual shareholders would be receiving an equal portion of the£100m , and that the£100m was the total excess the shareholders would receive over the institutional investors. In fact, the current allocation shows that [Mr Wells] and the Maynards will receive£91m over what would have been the pro-rata share price - the amount they will receive in excess of the institutional investors is significantly higher (c195 m for those three; 204m total for the individuals)…” (3) It was put to him that it is clear that EY CV only had limited information on19 June 2014 when the memo and the valuation letter were being considered. He said that (a) the opinion does not need to get into this level of detail of who was getting what, whereas (b) this was a quantification exercise and they went back to make sure the quantification was correct. There were two different processes. EY Sauflon had information when they wrote the memo and the valuation letter. This is a separate concern; a quantification exercise for management purposes. It was put to him that when he and EY CV were considering the EY Sauflon advice it was relevant for them to know the size of the difference in value of the price per share. He said that EY Sauflon was aware of those details and this is a different process as a quantification exercise. This is trying to figure out “what it is in case we need to operate PAYE. There are two different things; they are related, but two different things”. (4) He accepted it is clear that Ms Cooper/EY CV was surprised by the size of the difference in price per share as it was significantly more than she had understood the position to be a week previously. He did not accept it was news to him. He did not directly answer if he knew the size of the difference before he received this email. He said again this is a separate issue than that dealt with in the memo and valuation letter. This correspondence shows they were trying to quantify what the exposure is: “so you get to a different level of review and assessment…This is a quantification exercise. It has nothing to do with the opinion…This is basically saying what is the risk that we are taking as a company, could we agree to this? And that is why you get to this level of details…this gets very technical…This is a pure quantification exercise. So management in a commercial organisation could look and say, “We understand the risk is remote but we want to still understand what is the maximum exposure”
“The qualitative analysis to get us to these numbers is as follows: • Based on the valuation letter issued to the sellers, there remains a filing position that employment taxes need not be withheld from Alan Wells and the Maynards. • There is a very high chance that HMRC will scrutinise the transaction, given the amounts involved – ie ‘detection risk’ of challenge is high. • If the transaction is audited, it is likely that HMRC will start from a ‘worst case’ position, being that the individuals’ shares (including AW’s shares) are employment related securities and that the whole excess is therefore taxable • From this starting point, the company is likely to reach a negotiated settlement, based on the arguments set out in the advice provided to the sellers and documented elsewhere (control premium etc). We have assumed 50% in the attached, for indicative purposes only. • If picked up on audit, penalties of between 15% and 100% will apply. We have assumed penalties of 30% as a ‘most likely’ outcome based on our experience.” (Emphasis added.)
“We requested someone to make sure that this quantification exercise was corrected, and that is what happened, that is what we are discussing here.”
“just got off the phone with EY UK, it looks like the exposure is substantially higher than what it was anticipated. Upon further review of the allocation schedule, it has been determined that the disproportionate amount is higher than originally thought I have asked EY to check those figures with Latham, I will revert back to you later today.”
“You are telling us we pretended to do the diligence just to create a charade for HMRC; that is what you are saying. And you are accusing a company in a public forum of that.”
“we assumed that all individual shareholders would be receiving an equal portion of the 100m, and that the 100m was the total excess the shareholders would receive over the institutional investors.”
“So$100 million here was then allocated more precisely. That is all that is happening here.” (2) It was put to him that when, in the period from 17 to20 June 2004 , he reviewed the memo and valuation letter, he proceeded on the incorrect assumption that all of the majority shareholders would be receiving an equal portion of the£100 million excess consideration. He said due diligence does not end until the deal is closed and he cannot “recall every little thing I knew, what day, ten years ago”
“This is something different. For this purpose, we needed to get to a level of detail that at the time, the EY team had not done and the others were doing a quantification exercise. Two different processes, two different sets of people, two different sets of issues” (3) It was put to him that in his email his analysis is not based on an assessment of the likelihood that the excess consideration is taxable; but rather on the basis that if HMRC challenged this, there would be a negotiated settlement. He said, in effect, that to consider what a negotiated settlement might be is standard practice “when you do due diligence. You assess your risk and then, okay, is there a scenario where settlement could come out and that is just a speculation of what could happen in the future. Just for quantification purposes.” (4) He was asked if this was all for the purposes of a cost/benefit analysis of weighing the potential tax cost against the financial consequences of losing the deal. He said: “This is a quantification or the potential exposure including scenarios where there would be a negotiated settlement.”
“….Agostino is summarising the risk and will circulate it in a separate email. Based on the latest information the risk is slightly less than$100M in a 'most likely worst case scenario'. That’s obviously strange wording but more info will follow… Brad Wells and John Maynard had a meeting with Alcon… Alan [has] said he’ll stick with our deal if we can get the tax issues resolved in the next few days ... Given I’m comfortable paying upwards of$1.5 B for this deal I strong believe we should accept this tax risk and close the transaction. I believe we should attempt to negotiate today and tomorrow to try to get as much protection as possible but get it done with a Monday signing and announcement.”
“Latham is preparing a counter-memo where we accept the tax exposure of Alan and John on the extra compensation they are receiving. We will be extremely clear about the details. We’re targeting sending that to them tonight subject to everyone’s review. From an exposure standpoint, there’s no perfect answer. Based on the facts for this tax exposure, best guess is somewhere around: What are the odds the HMRC evaluates this transaction - 100% given its size. What are the odds the HMRC evaluates and challenges this transaction - probably a 35% chance. What are the odds that HMRC evaluates the transaction, challenges it and once completing its investigation, decides against us - again, probably around a 35% chance. If the HMRC does investigate it, and does decide against us, and we go to settlement discussions, what’s the 'most likely worst case” - 45M pounds Given all this, we’ll work towards finalising the deal tomorrow and signing very soon.” (Emphasis added.)
“Do we need to formalise in an email that we are following that advice…that should have been captured on email and saved for HMRC for later use?...The memo is there, the advice was there, it has been reviewed by myself and my standard consulting team and we followed E&Y advice which is clearly stated that this was a market value transaction and PAYE was not to be operated.”
“So, again, we are looking at a sequence of events that eventually culminated in the final issuance of the opinion letter which the company and myself have relied on.”
“Sean [Finn] mentioned that you and EY may be visiting excess deal consideration to Alan and the Maynards for non-competes to mitigate potential tax exposure (for Alan). It would be difficult to introduce this change now, but was there any outcome or conclusion that this is something we should explore.”
“you continue to look at the structure of the deal to continue to improve it and minimise tax risk. This was a conversation, a discussion if there was any need to change the structure and the conclusion there was not. This is again how due diligence operates. You continue to look and to structure the deal, not just in this case, in any case…to make sure you have optimised your position. There is nothing sinister about this. This is basically the company, the advice is looking and saying is there something else that should be changed, and the conclusion is there was not.” (2) A response from Mr Ricupati in which he said: “I am not aware of us changing anything. It was mentioned…as a defence mechanism we could take different approaches but no one was contemplating changes to the spa. Let me know otherwise.” (3) A reply from Mr Finn copying in Ms Cooper: “To close the loop on this we had a brief discussion at the weekend with EY. Given that the income tax risk on the 'excess' purchase price element reverts to CV, there was a suggestion that we should perhaps reconsider the original proposal which was to make payments for restrictive covenants/non−competes. These would certainly be subject to income tax and NICs for the Maynards (and of course they would expect to be paid whole for any taxes) but my understanding is that [Alan Wells] would have a better argument that these payments would not be subject to income taxes/[NICs] ... So the trade-off would be a certain immediate cost and a lower ongoing risk for [Alan Wells]... vs taking the future risk on the current structure. However, given that there would need to be changes to the SPA and essentially a reintroduction/negotiation of this with the Maynards and [Mr Wells] ... it would obviously add delay and process. I’ve copied the EY team who may want to add something.”
“That is exactly my point. The opinion was crystallised on June 20 when we received the final opinion letter and it was issued under the name of the company on August 20.” (Emphasis added.)
“This is not how due diligence and how the real world operates…you analyse…you make a conclusion and you continue to see if you can improve things.”
“We had our own advice. We had a memo we followed. Since when it’s not reasonable to follow an opinion from a Big Four firm supported by one of the largest law firms in the country?...this is just because you are limited in your world and you are disconnected from how things work. A reputable firm gives you an opinion. The opinion was reviewed by my team, including Latham. We relied on the opinion. We had no reasons to believe their opinion is not to be followed.”
“how do you feel about the tax side letter not being reviewed by the CVHL board? I’m guessing that is something that Lathams feel we need approved at the CVHL level, but Agostino would really like to see it left out of the meeting if possible.” (2) Mr Ricupati said that he took this view at the time as: “those are complicated tax matters that we typically do not bother the board level to discuss. There was no financial consequence for this. There was no financial accrual for this. It had no impact over our P&L. We keep things simple for the board and that is the reason. Again, in the real world, you limit the information given. You keep simple. You make sure that you don’t overburden the board with information and this is a specific tax issue that really had no financial consequence for the company.” (3) He was asked how it could have no financial consequence given that CV was to provide an indemnity for a very substantial tax liability. He said: “there was no immediate financial consequence” and this was “a future risk that had no impact to the board at the time”
“Keep in mind Greg Matz was part of the board and he was part of this process and he was aware of everything that was happening”
“80. — Determination of unpaid tax and appeal against determination (1) This regulation applies if it appears to HMRC that there may be tax payable for a tax year under 67G, as adjusted by regulation 67H(2) where appropriate, or regulation 68 by an employer which has neither been - (a) paid to HMRC, nor (b) certified by HMRC under regulation 75A, 76, 77, 78 or 79. (1A) In paragraph (1), the reference to tax payable for a tax year under regulation 67G includes references to – (a) any amount the employer was liable to deduct from employees during the tax year, and (b) any amount the employer must account for under regulation 62(5) (notional payments) in respect of notional payments made by the employer during the tax year, whether or not those amounts were included in any return under regulation 67B (real time returns of information about relevant payments) or 67D (exceptions to regulation 67B). (2) HMRC may determine the amount of that tax to the best of their judgment, and serve notice of their determination on the employer…. (5) A determination under this regulation is subject to Parts 4, 5, 5A and 6 of TMA (assessment, appeals, collection and recovery) as if– (a) the determination were an assessment, and (b) the amount of tax determined were income tax charged on the employer, and those Parts of that Act apply accordingly with any necessary modifications.” (a) paid to HMRC, nor (b) certified by HMRC under regulation 75A, 76, 77, 78 or 79. (a) any amount the employer was liable to deduct from employees during the tax year, and (b) any amount the employer must account for under regulation 62(5) (notional payments) in respect of notional payments made by the employer during the tax year, whether or not those amounts were included in any return under regulation 67B (real time returns of information about relevant payments) or 67D (exceptions to regulation 67B). (a) the determination were an assessment, and (b) the amount of tax determined were income tax charged on the employer, and those Parts of that Act apply accordingly with any necessary modifications.”
“(1) If any PAYE income of an employee is provided in the form of a readily convertible asset, the employer is to be treated, for the purposes of PAYE regulations, as making a payment of that income of an amount equal to the amount given by subsection (2). (2) The amount referred to is the amount which, on the basis of the best estimate that can reasonably be made, is the amount of income likely to be PAYE income in respect of the provision of the asset.” (b) Section 698 ITEPA applies, amongst other circumstances, where “by reason of the operation of…(f) section 446Y… , in relation to employment-related securities, an amount counts as employment income of an employee” on the basis that certain provisions including s 696 have effect as if “(a) the employee were provided with PAYE income in the form of the employment-related securities by the employer on the relevant date, and (b) the reference in subsection (2) of section 696 to the amount of income likely to be PAYE income in respect of the provision of the asset were to the amount likely to count as employment income.” (c) The deemed payment is treated as having been made on the “relevant date”, which in a case within s 446Y, is the date of the disposal of the securities (s 698(6)(e) ITEPA). (d) Hence, under Part 11 of ITEPA, the employer is required to operate PAYE by reference to the “best estimate that can reasonably be made” at the “relevant date” (the date of disposal of the shares) of the amount that is likely to count as employment income (see R (oao UBS) v HMRC[2024] STC 1510 (“UBS”) at [5] to [8]). The terms “best estimate” and the reference to the amount of income “likely to be”
“The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.”
“The ‘reasonable care’ which should be taken is to be assessed by reference to what a reasonable and prudent taxpayer would do looking at an objective hypothetical standard. But what that reasonable and prudent taxpayer would do is not assessed in a vacuum but by reference to the actual circumstances of the taxpayer in question.”
“We expect a reasonable taxpayer, in the context of a sale of shares generating a substantial gain, to ensure that he fully understands the basis of the advice, mindful of the fact that it is his obligation to ensure the correct capital gain is included in the return. Where, as here, the hypothetical taxpayer is to be attributed with the level of knowledge and understanding we would expect of a person of the appellant’s background, we would not expect such a taxpayer blindly to accept advice, even though provided by highly reputable professionals, without giving due consideration to understanding fully the advice and to some extent, depending on the type of advice and what can reasonably be expected, assessing whether it makes sense. A person who is not himself a qualified professional in the type of advice sought clearly cannot be expected to be able fully to evaluate the advice given and indeed hence why he is taking professional advice. However, a person with the understanding and knowledge that may reasonably be attributed in this case, may be expected to question advice if there is a reason to do so which ought to be apparent to such a person. We note that the Special Commissioners in AB seem to have taken a similar approach in the context of the negligence test as they concluded that it is reasonable for a taxpayer to rely on professional advice if is not ‘obviously wrong’.”
“depends on the facts, in particular whether the relevant questions were the subject of advice by someone with appropriate expertise who had knowledge of all the relevant facts, including the relevant documentation.” (3) As in this case, the further question was whether, for some of the tax years in issue, the appellant had brought about a loss of tax carelessly for the purposes of s 36(1) TMA (see [57] of Mainpay CA). The tribunal held that the taxpayer’s failure to take reasonable care to ensure that the contract was an overarching contract of employment had caused the loss of tax (see [70] an [71] of Mainpay CA). The UT upheld the tribunal’s decision (see [89] of Mainpay CA). (4) On this issue, at [148] of Mainpay UT, the UT said that HMRC advanced (amongst other arguments) a “knockout” argument that: “because s 118(5) TMA provides that “a loss of tax or a situation is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss or situation”…once a failure to take reasonable care is established, it inevitably follows that the taxpayer brought about the loss or situation”
“The phrase “brought about” is a synonym for “caused” (see [106]). (3) She then, at [107], set out how s 36(1) operates and said that in s 36(1): The phrase “brought about” is, again, a synonym for “caused” and: “Section 118(5) must be read as a whole. It simply repeats the phrase 'brought about'. That makes it clear that section 118(5) endorses, and does not qualify, still less contradict, the apparent meaning of the phrase 'brought about' in section 36(1). The focus, rather, is explaining what 'carelessly' means for the purposes of the TMA. Section 118(5) explains that there is the relevant lack of care if 'a person fails to take reasonable care to avoid bringing about that loss or situation'.” (Emphasis added.)
“if section 118(5) has the meaning for which HMRC contended in the UT, it had a profound and unheralded effect on the position under the previous legislative provisions, which clearly required a causal link between the loss and the acts or omissions of the taxpayer. Such a change would have required very clear language. There are no words to show that any such causal link has been removed by section 118(5). On the contrary, the words 'brought about', which are used in the heading and in the text of section 36, and in section 118(5) show the very opposite.”
“The point about the advice sought from, and given by, Mishcon de Reya, is that its premise was that the expenses in question were deductible business expenses…Mr Hugo knew that the question whether expenses can be reimbursed tax-free is itself complicated…It was not 'reasonable' for him to rely on a vague assurance that the form of the contract would not affect Mainpay’s ability to reimburse expenses. He could not have expected Mishcon de Reya to do that, since they did not have the relevant information…The fact that Mainpay had a different adviser who advised on expenses and who did not appear to have been consulted on that point confirmed the [tribunal’s] view that it was not reasonable to rely on vague assurances from Mishcon de Reya, when they did not have full background facts…”
“clear that the failure to take reasonable care to ensure that the contract in question was an overarching contract of employment led directly to the loss of tax as a result of Mainpay treating the expenses as deductible when in the absence of an overarching contract, they were not.” (2) At [116], she explained that the loss of tax was that part of the workers’ pay was treated as tax-free when it should have been subject to the deduction of tax. On the tribunal’s findings, it is obvious that had Mainpay taken reasonable care, the contracts would have been overarching contracts of employment and the reimbursement of the relevant expenses to workers would not have been liable to tax. Mainpay did not take reasonable care to ensure that the contracts were overarching contracts but reimbursed the expenses free of tax, as if they had been, when, in law, those payments were liable to tax. Had Mainpay taken reasonable care, therefore, on the tribunal’s findings, that loss of tax would have been avoided. She concluded that on these particular facts HMRC had “done enough” and it was not necessary for the tribunal to make any more findings about what would have happened if Mainpay had taken reasonable care. The tribunal nevertheless considered what would have happened if Mainpay had asked for specific advice even though that was not necessary on these facts. Laing LJ did not consider that the tribunal was required: “to speculate about what might have happened if further advice had been sought, all the more so because a taxpayer cannot be required to waive legal advice privilege, so that the [tribunal] would not necessarily have and in this case did not have all the relevant evidence”. (3) She agreed with the UT’s analysis on the “brought about” point in [159] and [161] of their decision in Mainpay UT and said that is reinforced by what she then said about the burden of proof. She summarised [159] and [161] of Mainpay UT, at [87] to [89], as follows: “What HMRC had to show 'to establish that a taxpayer has failed to take reasonable care to avoid the loss of tax' would depend 'entirely on the facts'. If the relevant lack of care was a deficiency in advice, HMRC needed to establish that the relevant deficiency could have been avoided by the taxpayer. How would depend on the facts and on the nature of the deficiency in the advice. The UT gave examples in paragraph 157. To that extent, HMRC needed to show what the taxpayer 'should have done differently' (paragraph 158). But the burden of proof did not entail that HMRC had 'to prove a particular counter-factual outcome'. If the carelessness was a failure to take advice, HMRC was not obliged to show, on the balance of probabilities, what the result of remedying the deficiency would have been. HMRC did not have to prove that if the deficiency in advice had been remedied, 'a failure in the arrangement to achieve its intended purpose, which led to a loss of tax, would have been remedied'. Not all problems can be fixed. The [tribunal] should not be required to speculate about the taxpayer's response to adequate advice (paragraph 159). Nothing in section 118(5) removed the need for a 'connection (to use a more neutral term) between the carelessness and the loss of tax'. Carelessness was not enough; it the carelessness must have been a failure to avoid bringing about the loss of tax'. A general lack of care 'which did not contribute to the loss of tax is not enough' (paragraph 161) (my emphases). The [tribunal] was entitled to reach the conclusions which it did on 'the causation issue'. It was entitled to conclude that Mainpay’s 'failure to take reasonable care to ensure that the 2010 Contract was an overarching contract of employment which caused the loss of tax' (my emphasis). On the facts found, Mainpay should 'have done differently'. It should have asked 'an appropriately qualified adviser whether the 2010 Contract as drafted (including a provision stating that it was not a contract of employment) was an overarching contract of employment, or otherwise effective to achieve the aim of the arrangements in relation to reimburse expenses'. The [tribunal] was not required to go further to put HMRC to proof of what Mainpay would have done if it had taken that advice, such as amending the contract, introducing a retainer so that there was mutuality in the gaps between assignments or deciding not to claim the deductions which gave rise to the loss of tax (paragraph 161).” (4) As regards the burden of proof she noted that it was not in dispute that HMRC has the burden of proving that section 36(1) applies (as the UT accepted at [153] of Mainpay UT): “On the facts of this case HMRC had made out a prima facie case that Mainpay had been careless, and that that carelessness had brought about a loss of tax. There was then an evidential burden on Mainpay, if it wished to contradict that prima facie case, to adduce evidence to show, on the balance of probabilities, that it had taken reasonable care, and/or that any lack of care did not bring about the loss of tax. Mainpay did not do that…”
“(1) What was it that HMRC were alleging Mainpay should actually have done or known? (2) When is it said that Mainpay should have done or known that? (3) Why is it said that Mainpay should have done or known that? (4) If Mainpay had done or known the thing in question, how would matters have been any different in relation to the loss of tax?” (see Mainpay UT [146]). That is what the CA referred to (using the words of the UT in Mainpay UT) as “a particular counter-factual outcome”