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In 2004, four managers of a successful trading company (A Ltd) agreed to buy out the director shareholders. As the managers did not have sufficient personal cash/assets to finance the purchase, an MBO was suggested whereby the trading company could fund the share acquisition. A NewCo (MBO Ltd) was set up and agreed to acquire 100% of A Ltd's shares at an agreed price over a period of 30 months. The four managers are/were equal shareholders in MBO Ltd. Over the next 30 months, cash was loaned by A Ltd to its holding company, MBO Ltd, which in turn paid the former owners.
In 2004, four managers of a successful trading company (A Ltd) agreed to buy out the director shareholders. As the managers did not have sufficient personal cash/assets to finance the purchase, an MBO was suggested whereby the trading company could fund the share acquisition. A NewCo (MBO Ltd) was set up and agreed to acquire 100% of A Ltd's shares at an agreed price over a period of 30 months. The four managers are/were equal shareholders in MBO Ltd. Over the next 30 months, cash was loaned by A Ltd to its holding company, MBO Ltd, which in turn paid the former owners. The current position is therefore a large loan debtor in the trading company and an equivalent creditor in MBO Ltd matched by intangible assets acquired, i.e., the shares in the trading company.
We have never seen an MBO structured in this way; in our experience the trading company would normally pay dividends to its parent MBO company. Our concern is whether HMRC could deem the loan to be a TA 1988, s 419 distribution.
Two of the managers now wish to exit. Will it cause difficulties to set up MBO 2 Ltd (owned by the two remaining shareholders), which will own MBO Ltd and the trading company? Our advice will be to pay dividends from the trading company in the usual way up through MBO Ltd then on to MBO 2 Ltd.
Getting things right at this time is crucial because it is quite possible — given the sort of industry the company is engaged in — that a larger (possibly quoted) company could appear on the scene in the foreseeable future and offer to buy the business.
Query T17,033
