More Facts Resolve Tax Risks –

The Essence of a Transaction –

THE ENTIRE TRANSACTION, and its individual parts, must be carefully scrutinized to ensure that each component is legally and properly implemented. It may be that one of the transaction legs was not implemented properly by the financial institution and is therefore invalid. This flaw, if a fundamental pillar of the transaction, could shift the liability to the financial institution, or another party that failed to execute it properly.

In summary, the taxpayer must investigate the transaction from all angles as they will be held accountable. In recent times, it has become apparent that with the execution of a series of steps in more complex mergers and acquisitions, special resolutions are required to be registered at the company’s registrar’s office, of the appropriate regulator. Often this step is ignored, which means that a key step in the series of steps has not been properly executed. Unexpected and negative tax consequences may flow as a result. Double-check. Other times, taxpayers take advice from corporate advisors, change aspects of the transaction that may be key, and then make the cardinal error of not going back to the corporate advisors to double-check.

In a recent case, the corporate advisors had structured a share buyback transaction by granting the subsidiary company the option to buyback its shares from a shareholder at a fixed price in the future, after paying a price for the option now. The company secretary decided to amend the transaction without referring the detail back to the corporate advisors. The amendments to the agreements were made. Eighteen months later, when the subsidiary company needed to exercise the share buyback option, it was discovered that the wording of the agreements had been changed by the company secretary in such a way that the option and buyback had taken place simultaneously eighteen months before. The problem was that the special resolution giving effect to this transaction, although signed eighteen months before, waiting for the option to be exercised, could no longer be implemented as it should have been registered by law within six months of the resolution having been taken. The entire transaction had to be redone. Fortunately it was discovered that due to the share buyback being invalid, as the special resolution was not registered, there were no tax consequences in terms of the Companies Act. However, there had been an unlawful transgression by not registering the special resolution.

In accordance with Circular 230 Disclosure