Priority Returns and EIS – The Second Instalment

Last week we looked at the potential to ramp up an EIS shareholder’s share of proceeds on a sale to over 30%. This week we look at opportunities to ramp up value if there is no clear prospect of sale.

What if the company is not sold?

If no sale occurs then the EIS investor is likely to want some form of return.  Another way to address any imbalance would be to pay the EIS investor a higher proportion of dividends.  For example a 40% distribution could be made to the EIS investor.

It is important to note that, to satisfy the requirement of being “ordinary shares”, one of the conditions is that the shares must not carry a present or future preferential right to a dividend.

However, for shares issued on or after 6 April 2012 the scope of this provision has been limited so that, thereafter, preference shares will qualify as ordinary shares unless:

(a)   The rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. Note: this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so; or

(b)  The right to receive dividends is ‘cumulative’ – that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it a later time, normally once funds become available.

Often EIS companies will not pay dividends due to the attractions of a potential tax-free exit event (whereas dividends from EIS companies are taxable).

 

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