Joint Venture Business
A client of ours is engaged in providing IT maintenance contracts to business customers in the UK.
During the course of its trade, the directors of the IT business became associated with a key employee from a national IT recruitment agency who placed new recruits with a number of its own customers. As a result of the association and the obvious synergies between the two parties, they ultimately decided to team up to commence a brand new IT recruitment business on a joint venture basis.
There were inevitably a wide variety of commercial, legal and financial aspects to deal with to launch this new business, as there typically are for any new start-up, but one particularly important issue concerned the means by which we established the respective shareholdings in a new limited company set up for the purpose (the joint venture (JV) company). The circumstances and motivations were different between the individuals involved, reflected in the solutions adopted.
Starting with the recruitment employee:
In simple terms, the basic choices included:
(i) subscription for shares at the outset; or
(ii) granting HMRC-approved share options, probably using an “Enterprise Management Incentive” share scheme.
Our client decided that it was most appropriate for their situation for their joint venture “partner” to subscribe for shares and introduce some working capital into the JV company.
As far as the other shareholders were concerned:
The directors of our client were able to organise their share subscriptions (and introduction of working capital) within the “Seed EIS” tax advantaged investment rules, which provided 50% income tax credit against their income and CGT exempt status for the new shares after three years of ownership.
The share capital was organised into different share classes to provide flexibility over the payment of dividends to the shareholders.
Ultimately, the shareholders have structured their shareholdings to yield significant commercial and fiscal benefits.