The joy of giving

For those new to such cases, they have related to cash shell companies that acquired a trading company shortly before listing on the Channel Islands Stock Exchange or being entered onto the AIM market. The prices at which the shares were priced by market makers often represented something like a four-fold increase in value over amounts subscribed. There were then either very few trades at close to this price or a relatively thin stream of trades. A large percentage of the shares held were blocked from trading.

Many of the shareholders made gifts to charity of some or all of the shares very shortly after launch onto the markets. The prices applicable to these gifts of shares were the subject of these various Tax Tribunal hearings.

This article looks these cases, J Netley and HMRC (Frenkel Topping Group plc).

The cash shell, Forward Link plc, had issued 15,721,042 shares for total consideration of £1,415,200, giving an average subscription price of 9.0p per share.

Frenkel Topping Group is a financial services business of two companies with its roots in the very well-known personal injury specialist accountants of the same name.

Some 66% of the shares in the financial services companies were acquired by Forward Link plc in exchange for the issue of 26,450,000 shares. At the same time, the fund managers to Frenkel Topping Group subscribed for 3,428,572 shares at a price of £600,000, equivalent to 17.5p per share. These transactions happened immediately prior to the launch of Forward Link plc (with its name now changed to Frenkel Topping Group plc) onto the AIM market. The shares were priced at 48p per share. There were a small number of trades at, or close to, this price.

The initial shareholders had subscribed at an average of 9.0p per share. Was this the best guide as to the value of the shares issued to the former shareholders of the Frenkel Topping companies?

Was the value of 17.5p a better indication of value? This was the amount paid by the fund managers. Were they a special purchaser? If they were not a special purchaser, what had enhanced the value of the existing shares by 8.5p (this is a total potential uplift in value of £1,336,000)?

The market capitalisation exceeded the amounts subscribed for the shares (using a value of 9p for the shares issued to the sellers of the financial services business) by some £17.5 million. The relevant figures were a market capitalisation of £21.89 million and amounts subscribed/exchanged of £4.40 million. If a higher value was ascribed to the shares issued to the sellers, the total values were still very significantly below the market capitalisation. What was the source of this extra value?

The only significant assets in Frenkel Topping Group were the recently acquired financial services business and cash. Did this uplift indicate that the sellers of the financial services business had received consideration very significantly below market value?

Alternatively, is there an uplift in the value of companies at the time of their launch onto the markets? If this is the case, why do trade sales take place if the markets beckon with far higher prices?

The hearing was a marathon of 11 days: there were experts giving evidence on the inner workings of the AIM market, including the role of NOMADs, market makers and brokers.

The hearing dissected the inner nature of AIM shares: the shares are dealt on a recognised exchange; they are not quoted on the Stock Exchange Daily Official List (SEDOL); they are not listed on a recognised exchange.

This is of some considerable importance for capital gains tax valuations: it means that section 273, Taxation of Chargeable Gains Act 1992 is of relevance. The views of the prudent prospective purchaser are therefore directly relevant.

The Tribunal Chair noted that the result of the share value claimed of 48p was that the tax relief claimed by Mr Netley exceeded the amount that he had subscribed for the shares.

The hearing was a marathon of 11 days: there were experts giving evidence on the inner workings of the AIM market, including the role of NOMADs, market makers and brokers.

The hearing dissected the inner nature of AIM shares: the shares are dealt on a recognised exchange; they are not quoted on the Stock Exchange Daily Official List (SEDOL); they are not listed on a recognised exchange.

This is of some considerable importance for capital gains tax valuations: it means that section 273, Taxation of Chargeable Gains Act 1992 is of relevance. The views of the prudent prospective purchaser are therefore directly relevant.

The Tribunal Chair noted that the result of the share value claimed of 48p was that the tax relief claimed by Mr Netley exceeded the amount that he had subscribed for the shares.

The Tribunal Chair was faced with two very different values, with evidence from two expert witnesses supporting their calculations.

The rationale was unexpected: the Chair decided on a value of 17.5p per share. This was the same price as the subscription by the fund managers shortly before the launch onto AIM. It required a p/e ratio of 24x in order to support this price. A base ratio of 11.9x was doubled on entry into the market and this was then rounded to 24x.

The decision therefore reflected a very high p/e multiple for a company with variable profits and losses and which was not stamped with the expectation of high growth.