VCT: VCT approval: share exchanges and reconstructions: earn-outs
SI2661/2002 Regulation 10
As at VCM54120 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.
- 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.