Navigating Complex Transactions in the Life Sciences Sector
Nathan Sutcliffe · November 30th 2023 · read
In the dynamic field of Life Sciences, we see a consistent theme with historical share transaction challenges when conducting tax due diligence. This can have significant implications on the current value of the business.
We see many challenges around employment related security share transfers, including instances of both approved and unapproved share schemes, when carrying out tax due diligence work for our clients.
In the context of emerging startups, businesses often undertake significant actions without fully realising their implications, especially in the initial stages when they may perceive the value as relatively low. This can however, lead to unforeseen consequences years down the line when the business is worth so much more and this can have a huge effect when selling the business.
For instance, co-founders engaging in informal share transfers—such as one co-founder buying shares from another for a nominal amount like £1—may result in complications. Although the initial transaction may seem inconsequential due to the perceived low value, as the business grows over the years, the discrepancy between the actual value and the nominal amount can have tax implications. This can manifest when the shares are eventually sold, potentially leading to the proceeds being treated as PAYE rather than capital on exit.
Another scenario involves unapproved options granted to individuals (referring to an option scheme not governed by a specific set of tax rules). While such schemes may initially carry no immediate tax charges, issues arise when the options are exercised before a sales transaction. This triggers PAYE and NI contributions, imposing a tax rate of around 60% on the individual, where the employee is made liable for both employer and employee NI contributions.
The challenge intensifies when the transaction does not involve immediate cash payment, as is common in many deals. In such cases, the individual may struggle to cover the substantial tax burden. Both buyers and sellers must grapple with this dilemma, necessitating solutions to address the financial constraints. This may involve revising the consideration terms, potentially offering the individual a loan for a specified period. Addressing this problem is crucial for a smooth and equitable resolution between all parties involved in the transaction.
If you are a start-up/scale-up, speak with an expert before any share transactions take place to safeguard future interests.
If you are a buyer, diligence on share history is important. Conduct thorough due diligence on share history to avoid unforeseen tax issues post-sale.
Unapproved Share Options
The Seller Perspective
Be transparent, clearly communicate potential tax implications to individuals upfront. Managing expectations is crucial and explore alternative routes to incentivise individuals.
The Buyer Perspective
It is important to identify existing options, holders, and willingness to accommodate renegotiations with affected individuals.
Our team implemented a strategic approach that involved early consultation with all stakeholders, transparent communication, and meticulous due diligence on the share history.
It is important sellers and buyers are equipped with the knowledge needed to navigate tax implications, preventing late-stage obstacles in deal negotiations.
The lessons learned from this case study highlight the importance of early advice on share options, providing a roadmap for future transactions.