VCM60156 - VCT scheme: general: share exchanges and reconstructions: earn-outs
SI2661/2002 Regulation 10
This instruction applies where there has been an exchange of
shares or securities as described in
VCM62400 or a scheme of reconstruction
as described in
VCM62420.
As at
VCM60154 Company B may acquire shares or
securities in Company A and give initial consideration,(either
shares/securities or cash) plus an earn-out right. If the necessary
conditions are met the right will become due. Such rights are often
satisfied by a new issue of shares or securities in Company B. A
VCT may exchange shares or securities in company A for
consideration including an earn-out right. When, in pursuance of
the right, shares or securities in company B are issued to the VCT,
these will be ‘earn-out shares or securities’. The
‘earn-out shares or securities’ will be treated as if
they were received in exchange for the company A shares or
securities.
The VCT can then elect to recalculate the value of the
company B share and securities.
If the VCT does make an election, in both VCM60154 and
VCM60155, the formula shall be amended
so that:
- the earn-out shares and securities will be included in the calculation of Nv and Nmv at their market value immediately after they were issued, and
- the earn-out right is omitted from the calculation of C.
- To make an election (which will be irrevocable), notice must be given to HMRC within one year from the end of the accounting period in which the earn-out shares or securities are issued.
