Planning shareholdings for a joint venture company

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 shareholding stakes in a new limited company set up for the purpose. 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, (ii) the granting of HMRC-approved share options, probably using an “EMI” share scheme, and (iii) a receipt of new shares under the new “employee shareholding” initiative brought in in the Finance Act 2013. The last of these options enables an employer to provide £2,000 value of shares to an employee at no income tax cost to the recipient, in return for that person foregoing certain statutory employment rights.

Given that the new company needed a tranche of initial capital anyway (provided by the other shareholders), it was easily possible to establish and provide the £2,000 value requirement, and, the solution made sense for both parties because it (i) incentivised the key employee with free shares which will also be exempt from CGT upon a future disposal; and (ii) provided protections from employment law for the other shareholders at modest cost.

As far as the other shareholders were concerned:

The directors of our client were able to organise their share subscriptions within the “Seed EIS” tax advantaged investment rules for a (useful, if not major) 50% income tax credit against their investment and another CGT exempt status after three years of holding their shares.

Ultimately the shareholders have structured their shareholdings to yield significant commercial and fiscal benefits and have every reason to expect to realise the full benefits of both within the next five years.