Exception to the prohibition on cancellation schemes (Re Home Retail Group plc)

Exception to the prohibition on cancellation schemes (Re Home Retail Group plc)
In this case the High Court considered scales2whether Home Retail Group plc could rely on an exception from the Companies Act 2006 (CA 2006) prohibition on the use of cancellation schemes in connection with a takeover. The court considered whether the Ramsay principle of the interpretation of tax legislation affected the availability of the statutory exception that permitted a cancellation scheme involving the insertion of a new holding company into a group structure.

Original news

Re Home Retail Group plc [2016] EWHC 2072 (Ch)

In this case the High Court considered whether Home Retail Group plc (the Company) could rely on an exception against the CA 2006 prohibition on the use of cancellation schemes in connection with a takeover. The court considered whether the Ramsay principle of the interpretation of tax legislation affected the availability of the statutory exception that permitted a cancellation scheme involving the insertion of a new holding company into a group structure.

What was the background to the case?

On 18 January 2016, the Company announced that it had agreed to sell its Homebase business and that it would make a capital return to its shareholders of the net cash proceeds of the sale, amounting to some £200 million. Shortly afterwards, and before the Homebase sale had been completed, the Company reached agreement in principle on a takeover by Sainsbury. The consideration that Sainsbury was to pay took into account the fact that the Company would be returning the £200m to shareholders. This meant both that Sainsbury did not have to raise additional funds simply to acquire cash that the Company had already said that it would return to shareholders and that the takeover would not be large enough to constitute a Class 1 transaction.

The transactions would be effected in stages:

  • a 'Newco' would become the Company’s holding company, with the Company’s existing shareholders obtaining corresponding holdings in Newco
  • a reduction of capital would be undertaken to effect the previously announced return to shareholders
  • the shares in Newco would be compulsorily transferred to Sainsbury in accordance with provisions in Newco’s articles of asso

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