Deferred consideration: shares and securities: variation of sale agreement
Sometimes the vendor and purchaser agree to vary the terms of the original sale agreement after it has been entered into but before the right to deferred consideration has been satisfied. Where TCGA92/S138A treats the original right to receive deferred unascertainable consideration (`the old right’) as a security of a company, and the old right is extinguished, the assumed security treatment can be repeated in respect of the later right if
- the whole of the consideration for the extinguishment of the old right consists in another right (`the new right’) to be issued with shares in or debentures of that company,
- the new right is such that the value or quantity of the shares or debentures to be issued in pursuance of the right (`the replacement securities’) is unascertainable (see CG58024-27) at the time when the old right is extinguished, and
- the new right is not capable of being discharged in accordance with its terms otherwise than by the issue of the replacement securities.
For example the original agreement provides for the vendor to receive shares of a value equal to half of the profit of the company in the accounting period after the date of the contract. A deed of variation made shortly thereafter provides that the vendor would only get shares of a value equal to one third of the profit. If the original right to receive deferred consideration (a right to receive shares of a value equal to half of the profit of the company in the accounting period after the date of the contract) was treated as a security the new right (to receive shares of a value equal to one third of the profit of the company in the accounting period after the date of the contact) could also be treated as a security.