Preference shares: what are the issues?

When advising on various types of corporate restructures and takeovers preference shares are a common form of security to issue. Take for example a management buyout where the vendors may be retaining an interest in the company. In the absence of preference shares or loan notes to reduce the ordinary share capital to nominal value (or the incoming management team investing their own funds) it is difficult to mitigate an income tax charge on the transfer of value under the employment related securities (ERS) regime of ITEPA 2003 Part 7.

Therefore preference shares are a useful mechanism for ensuring there is no such transfer of value and depending on the ordinary share capital retained by the vendor shareholders HMRC may insist that any deferred consideration be irredeemable until a more complete exit.

Therefore it is crucial to understand the impact of...