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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: credits not brought into account: releases of debt: debt/equity swaps: ‘entitlement to shares’

Debt-equity swaps: the rules also apply to an ‘entitlement to shares’

CTA2009/S322(4) also applies where a debt is released in consideration of an ‘entitlement’ to ordinary shares. This covers the case where there is a binding agreement that the company will issue shares, but there is a gap between the debt release and the actual share issue.

It also applies where the creditor is issued with an option or warrant entitling it to subscribe for shares at a future date, provided it is likely that the option or warrant will be exercised. For example, the debtor company may need to get approval for an increase in its authorised share capital before it can issue new shares, and may issue the creditor with a warrant that can be exercised once the formalities have been completed.

Another reason for the issue of a warrant may be that where a lender holds more than a certain percentage of the issued capital of a borrower, regulatory rules may require the lender to increase the amount of regulatory capital it holds. In this situation, the warrant may only be exercised and shares issued immediately before the sale of the shares by the lender. Providing there is a genuine commercial expectation that the warrant will be exercised, the issue of such a warrant will be regarded as an entitlement to shares, and the guidance in CFM33200 to CFM33203 will apply equally to warrants. The existence of particular terms in the warrant, for example, entitling certain shareholders to preferential terms, will not affect this.

On the other hand, the issue of an option or warrant is unlikely to represent consideration for the debt release if its terms, or the surrounding circumstances, are such that it is unlikely ever to be exercised (see CFM33202).