A First-tier Tribunal has determined that, when a whole company is sold, valuers must look at the built-in rights of each share so that any private agreement between shareholders to divide the cash from the sale unevenly does not alter the legal and equivalent value attached to every share.

Background:

In 2014, CooperVision Holdings (UK) Ltd. acquired the entire share capital of Sauflon Pharmaceuticals Ltd. for approximately £665m. While the global sale price was accepted as an ‘arm’s length’ market value, the proceeds were not distributed equally on a pro-rata basis among all shareholders. Specifically, three individuals—Alan Wells, John Maynard, and Bridget Maynard—negotiated and received a significantly higher price per share than the other majority and minority investors.

HMRC contended that, because these individuals were employees or directors, the shares constituted employment-related securities and the “excess” payment above the standard market value should be taxed as employment income rather than capital gains.

The appellant argued that the founders had acquired their shares as investors rather than by reason of employment and that the private commercial negotiation of the price split reflected the true market value of those specific holdings. They also challenged HMRC’s ability to issue tax assessments outside the standard four-year window, claiming they had not been careless in their tax reporting.

Decision:

The Tribunal ultimately sided with HMRC on the core issues, ruling that the price differential was taxable as earnings because the statutory definition of market value requires a hypothetical objective test that ignores personal leverage or private side agreements. The Tribunal also found that the company had been careless in failing to seek specialist employment tax advice regarding the lopsided distribution, which enabled HMRC to use an extended six-year time limit to collect the unpaid PAYE and National Insurance (NI) contributions.

The Tribunal specifically addressed the “alliance” of the majority shareholders. It found that the founders used their control of the board and the negotiation process to “squeeze” the minority shareholders—specifically Prism and Bond—into accepting less. From the standpoint of company law, the Tribunal viewed the founders’ ability to extract a higher price as not being an attribute of the shares themselves, but rather a result of their personal leverage and their refusal to sell the company unless they themselves received a “spectacular” personal return. They held that the determination of “market value” must exclude influential factors that are personal to the specific seller or derived from their unique ability to obstruct a deal.

Implications:

This case highlights the tension between the private contractual freedom of shareholders to allocate sale proceeds and the statutory requirement to value shares objectively for tax purposes. This case serves as a stark warning to company directors and majority shareholders alike – your commercial “bargaining power” during a sale cannot override the objective valuation of shares for tax purposes. If you negotiate a higher price for your own stake at the expense of others, you may inadvertently transform a capital gain into a highly taxed employment income charge.

In many private company sales, founders often feel that, because they “built the business” or “hold the keys” to a deal, their shares are inherently worth more than those of passive investors or minority employees. This case clarifies that, while you are legally free to contract for a higher price under company law, tax law is far more rigid. The Tribunal ruled that “market value” is an objective, hypothetical test. It assumes a “prudent buyer” and a “willing seller” who are unrelated. Such factors as personal leverage, the threat of blocking a deal, or “rewards” for past performance are considered personal to the individual and must be stripped away when determining the value of the actual shares.

The Tribunal looked closely at the company’s Articles of Association. The founders chose not to use their “drag-along” rights (which would have forced everyone to sell at the same price) because doing so would have lowered their own payouts.

This “manoeuvring” was seen as evidence that the price split was an artificial allocation of value rather than a reflection of differing share rights.