Spc00693
CHARGEABLE GAINS – losses – whether made between connected persons on a sale immediately following a demerger to the shareholders of a listed company – yes by TCGA 1992 s 286(5)(b) – appeal dismissed
THE SPECIAL COMMISSIONERS
KELLOGG BROWN & ROOT HOLDINGS LIMITEDAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMSRespondents
Special Commissioner: DR JOHN F. AVERY JONES CBE
Sitting in public in London on 11 June 2008
Julian Ghosh QC and James Henderson, counsel, instructed by Norton rose LLP, for the Appellant
Rupert Baldry, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2008
1
DECISION
- This is an appeal by Kellogg Brown & Root Holdings (UK) Limited against an amendment to its company tax return disallowing its claim to deduct a capital loss of £14,867,445 against chargeable gains in its accounting period ended 31 December 2000. The Appellant was represented by Mr Julian Ghosh QC and Mr James Henderson, and the Respondent (“the Revenue”) by Mr Rupert Baldry.
- The issue in the appeal is whether the Appellant and Highlands Holdings (UK) Limited are connected persons with the result that the loss on the sale of shares by the Appellant to that company is not available against the Appellant’s gains generally.
- There was an agreed statement of facts as follows:
“The Parties to the arrangements
(1)The Appellant is a UK incorporated and tax resident company. It was incorporated on 11 December 1984 under company number 01870934. Its registered office is at Hill Park Court, Springfield Drive, Leatherhead, Surrey KT22 7NL, England. It was formerly known as Halliburton Holdings Limited.
(2)The Appellant was and had at the material time been a wholly-owned subsidiary of Halliburton Company, a US-based multinational company carrying on engineering and other operations worldwide. Halliburton Company’s shares were at the material time listed on the New York Stock Exchange. Halliburton Company was a Delaware corporation.
(3)The Appellant was at the material time a holding company for a number of UK resident subsidiaries within the Halliburton Company group. One of the divisions of the Halliburton Company group was an insurance division, and two of the subsidiaries of the Appellant were Highlands Insurance Company (UK) Limited (“HICUK”), an authorised insurance company established in the UK, and Highlands Underwriting Agents Limited (“HUAL”) - the “Highlands Companies”. Both HICUK (incorporated on 18 November 1974) and HUAL (incorporated on 12 October 1971) are UK incorporated and tax resident companies. Both companies now have a registered address of Bruton Court, Bruton Way, Gloucester GL1 1DA.
(4)The Appellant was a direct wholly-owned subsidiary of Halliburton Holdings, Inc. (“HHI”), a company which had several different classes of stock held by Halliburton Company and certain of its subsidiaries which were parent companies of the different divisions within the Halliburton Company group (including Highlands Insurance Group, Inc., the parent company of the insurance division); the different classes of stock enabled distributions from the Appellant which were derived from subsidiaries of the Appellant to be streamed to the appropriate divisional parent company within the Halliburton Company group.
(5)During 1995, Halliburton Company decided to spin off its global insurance division into a new company. In the UK, the intention was that the shares in the Highland Companies would be transferred to a newly incorporated and UK tax resident company, Highlands Holdings (UK) Limited (“HHUKL”), which was to be a subsidiary of Highlands Insurance Group, Inc (“HIG”) the intended new US parent company of the insurance division. HIG was a Delaware corporation.
The arrangements
(6)The spin-off was governed by a distribution agreement (the “Distribution Agreement”) dated 10 October 1995 between Halliburton Company and HIG. It is governed by Delaware law. That agreement provided for the “Distribution” to take place on the “Distribution Date”. In particular, the following provisions of the Distribution Agreement are relevant:
(a)Section 3.07 (Transfer of U.K. Entity) which provided for a “Newco” (ie, HHUKL) to purchase the share capital of the Highlands Companies from the Appellant “immediately following the Distribution Date”. The purchase price was to be provided by HIG subscribing for shares in HHUKL; an amount equal to the proceeds of sale of the Highlands Companies was to be applied by HHI in redemption of the Class E shares in HHI held by HIG. Section 3.07 provided for that redemption to take place following the Distribution, and that HHI would receive the funds required for the redemption by way of a dividend paid by the Appellant.
(b)Section 4.01 (Conditions Precedent to the Distribution) which provided for Halliburton Company’s obligation to implement the Distribution to be subject to a number of conditions being satisfied.
(c)Section 1.01 and Annex A (Schedule of Defined Terms) defined the “Distribution Date” as follows:
“Distribution Date” shall mean the date determined by the Board of Directors of [Halliburton Company] on which the Distribution shall be effected; provided, however, that the Distribution Date shall not be earlier than the 20th calendar day following the date on which the Information Statement is first mailed or otherwise delivered to holders of Halliburton Common Stock”.
(d)Section 2.02(b) provided that: Halliburton Company’s Board of Directors establish the Distribution Record Date and the Distribution Date before the effective date of the Registration Statement (as defined in Annex A). The Registration Statement was filed with the United States Securities and Exchange Commission, and comprised information required on a Form 10 and an Information Statement. The Information Statement was sent to all shareholders in Halliburton Company (as at the Distribution Record Date) on 5 January 1996 containing detailed information about the proposed Distribution and about HIG.
(e)The “Distribution” is defined by reference to the Recitals, which provided that:
“[Halliburton Company] owns of record and beneficially all the outstanding common stock, par value $1,000 per share, of [HIG] (the “Current Common Stock”) and proposes to distribute (the “Distribution”) all the Current Common Stock owned by it….to the holders of record of the common stock of [Halliburton Company] on the terms and subject to the conditions set forth herein”.
(f)Section 4.02 (No Constraint) of the Distribution Agreement provided that:
“Notwithstanding the provisions of Section 4.01 herein, the fulfilment or waiver of any or all of the conditions precedent to the Distribution set forth therein (a) shall not create any obligation on the part of Halliburton Company or any other party hereto to effect the Distribution, (b) shall not in any way limit Halliburton Company’s rights and power under Section 9.01 herein to terminate this Agreement and the process leading to the Distribution and to abandon the Distribution …”.
(7)In connection with the Distribution, two (non-UK resident) investors (Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. (together the “Investors”)) otherwise unconnected with Halliburton Company, agreed to invest in HIG by subscribing for convertible subordinated debentures and purchasing warrants to purchase additional common stock. An investment agreement (the “Investment Agreement”) dated 10 October 1995 between Halliburton Company, HIG and the two Investors provided for this. This was amended by an amendatory agreement dated as of 10 November 1995. The investment in HIG was to take place “subject to and immediately following the consummation of the Spin-Off Transaction” which was defined as the Distribution under the Distribution Agreement.
(8)The Distribution Agreement contained a number of conditions precedent to the Distribution (Section 4.01 of the Distribution Agreement). One of these conditions was that Halliburton Company had received from each of HIG and the Investors written confirmation that all the conditions precedent to the Investment Agreement, save for the Distribution itself, have been fulfilled or waived. Once the Distribution had been effected, the Investment Agreement would become unconditional (Section 4.01(e) Distribution Agreement).
(9)Section 3.07 of the Distribution Agreement was amended by an amendatory agreement dated as of 22 January 1996 between Halliburton Company and HIG (the “Amendatory Agreement”). That Amendatory Agreement provides for section 3.07 of the Distribution Agreement to be replaced by a new section 3.07 which provided for the sale of the Highlands Companies pursuant to the conditional sale and purchase agreement to take place “Following the Distribution on the Distribution Date”.
(10)On 16 October 1995, HHUKL was incorporated under the name of Sochold Limited. The share capital was increased to £10 million, the company’s name was changed to HHUKL, new directors were appointed and the shares were transferred from the subscriber to HIG.
(11)On 19 December 1995:
(a)HIG paid $10 million to HHI by way of a capital contribution;
(b)HHI loaned $10 million to the Appellant; and
(c)The Appellant subscribed for and purchased 6.4 million additional shares of HICUK for $10 million.
(12)On 26 December 1995, the Halliburton Company Board of Directors declared (inter alia) 4 January 1996 to be the Distribution Record Date and 23 January 1996 to be the Distribution Date.
(13)4 January 1996 was the Distribution Record Date.
(14)The Appellant entered into a sale and purchase agreement with HHUKL (the “Sale Agreement”) dated 18 January 1996 providing for the Appellant to sell the entire issued share capital in the Highlands Companies to HHUKL. The Sale Agreement is governed by English law. By resolutions adopted by the Boards of Directors of the Appellant and HHUKL on 19 December 1995 and 18 January 1996 respectively, the Appellant and HHUKL were authorised to enter into and carry out the terms of the Sale Agreement.
(15)The Sale Agreement reads (as far as is relevant):
“2. Purpose of this Agreement and pre-Completion matters including conditions precedent
2.1 This is an agreement for the sale and purchase of the Sale Shares.
2.2 The obligations of the parties in relation to the sale and purchase of the Sale Shares under this Agreement are conditional on:
(a) the Distribution (as such term is defined in the Distribution Agreement) being effected pursuant to the Distribution Agreement; and
(b) the Department of Trade and Industry confirming on terms reasonably satisfactory to the Purchaser that it has no objection to the new Controllers (“Controller” having the definition ascribed to it in the Insurance Companies Act 1982 as amended) of HICUK, or all applicable waiting periods during which the Department of Trade and Industry could institute investigations or enquiries against HICUK or the Purchaser or any such Controller having expired.”
(16)The Department of Trade and Industry confirmations that it had no objection to the new controllers (including HIG and the Investors) of HICUK were issued on 14 and 15 December 1995. A “controller” for this purpose means a managing director, chief executive or other person in accordance with whose directions or instructions the directors of the company are accustomed to act. In relation to a UK company it also includes a person who holds more than 10% of the shares in the company, is entitled to exercise 10% or more of the voting power or is able to exercise significant influence over the management of the company. Person in this context can include a company. As the Highlands Companies were to cease to be controlled by Halliburton Company, and instead to be controlled by HIG, it was necessary to obtain confirmation from the Department of Trade and Industry that there was no objection to this change in control.
(17)On 22 January 1996, among other things:
(a)Instructions in writing to Chemical Mellon Shareholder Services LLC (the “Distribution Agent” who was appointed by Halliburton Company in connection with the Distribution) to distribute in accordance with the Distribution Ratio (as defined in Annex A of the Distribution Agreement) to each holder of Halliburton Company common stock of record on the Distribution Record Date the number of shares of HIG common stock to which such holder is entitled were delivered by Halliburton Company to the Distribution Agent;
(b)A letter from HIG was delivered to the Distribution Agent acknowledging that all the conditions (set out in clause 4.01 of the Distribution Agreement) to the completion of the Distribution Agreement had been satisfied;
(c)HIG purchased from HHUKL for approximately $7.5 million in cash 4,870,000 shares in HHUKL. The Appellant made a $7.5 million partial payment on its indebtedness to HHI; and
(d)HHI redeemed its class E and class F shares of common stock held by HIG by payment of $7.5 million.
(18)On 23 January 1996, among other things:
(a)The bring down certificate dated 23 January 1996 was issued by the Secretary of State of the State of Delaware as to the due incorporation and existence of Halliburton Company;
(b)Officer’s Certificates were issued by Halliburton Company and HIG certifying to the Investors that the representations and warranties made by Halliburton Company as set out in the Investment Agreement were true and correct in all material respects and that Halliburton Company and HIG have complied in all material respects with the terms, covenants and conditions required by the Investment Agreement to be complied with;
(c)The Secretary’s Certificate was issued by Halliburton Company in accordance with Section 9.01 and 9.02 (a), (c) and (g) of the Investment Agreement;
(d)An Amendment and Acknowledgement was entered into between HIG, Halliburton Company and the Investors. This confirmed that the documents making up conditions precedent 4.01 (a), (b), (c) and (d) to the Distribution Agreement were ratified and approved for the purposes of the Distribution Agreement;
(e)The tax opinion from Vinson & Elkins LLP dated 23 January 1996 was delivered to Halliburton Company (condition precedent 4.01(h) Distribution Agreement);
(f)Letters from HIG and the Investors to Halliburton Company were issued confirming that all of the conditions precedent to the Investment Agreement (with the exception of the Distribution) had been satisfied and that upon effectuation of the Distribution, the obligations of HIG and the Investors to consummate the transactions contemplated by the Investment Agreement will be unconditional (condition precedent 4.01(e) Distribution Agreement); and
(g)The Secretary’s Certificate was issued by HIG in accordance with Section 9.01 and 9.02 (a), (b), (d), (e), (f) and (g) of the Investment Agreement.
(19)The Distribution was effected on 23 January 1996 (pursuant to Section 2.02 of the Distribution Agreement). Section 2.02(g) of the Distribution Agreement provided that the Distribution shall be effective as of 5:00 p.m. Houston time on the Distribution Date. This was amended by an Amendment and Acknowledgement on 23 January 1996 between HIG, Highlands Company and the Investors so that the Distribution would be effective as of 8:30 a.m. Houston time on the Distribution Date. A closing memorandum prepared by Vinson & Elkins LLP (the “Closing Memorandum”) sets out the steps taken in connection with the Distribution, sale of the Highlands Companies and the investment made by the Investors.
(20)The Closing Memorandum records that the Distribution was effected at 8:30 a.m. Houston time on 23 January 1996 and that the common stock of HIG was distributed to the registered holders (as at the Distribution Record Date) of the Halliburton Company. In accordance with the instructions given by Halliburton Company to the Agent on 22 January 1996, on 23 January 1996 the Agent caused the stock certificates evidencing the number of shares of Highlands common stock to be prepared and registered in the name of each stockholder in Halliburton (as at the Distribution Record Date) and caused such certificates to be posted to those stockholders.
(21)The Closing Memorandum records that the closing of the sale of the Highlands Companies began at 8:45 a.m. Houston time on 23 January 1996 and that HHUKL transferred $7.5 million to the Appellant in consideration for the share certificates and duly executed stock transfer forms representing all of the issued shares in the Highlands Companies, pursuant to the Sale Agreement.
(22)Halliburton Company was a publicly listed company whose shares were traded on a daily basis and whose shares were widely held; it only had one shareholder whose shareholding was at the relevant time in excess of 5%. As at 31 December 1995, that shareholder and its affiliates owned 5.95% of the common stock of Halliburton Company and as at 31 December 1996, that shareholder and its affiliates owned 11.13% of the common stock of Halliburton Company. The shareholders in Highlands Company on 4 January 1996 (the Distribution Record Date, being the date on which the holders common stock of Halliburton Company, who were entitled to participate in the Distribution, were ascertained) differed to those on 23 January 1996 (the Distribution Date). The issued common stock at the relevant time was 125 million. The total volume of stock publicly traded inclusive of the dates 4 January 1996 and 23 January 1996 was 20.4 million (ie, 16% of the issued share capital). However, this figure does not include any changes in beneficial ownership of stock or any stock changes which were not publicly traded which took place between this time. In addition, the Investors subscribed for $60 million worth of 10% convertible subordinated debentures with detachable common stock purchase warrants to purchase an aggregate number of shares in HIG which would entitle the Investors to acquire up to 43.7% of the shares in HIG. The conversion right attaching to the debenture was exercisable from 23 January 1997 until 31 December 2005.
The claim and the appeal process
(23)The Appellant claimed to set off the capital loss arising on the sale of the Highlands Companies against chargeable gains of £14,867,445 in respect of the accounting period ended 31 December 2000. The Respondent contends that the loss (the quantum of which has not been finally agreed) is not available for offset against such chargeable gains pursuant to section 18(3) Taxation of Chargeable Gains Act 1992.
(24)A Notice of Amendment to a company tax return was issued on 14 August 2007 and a notice of appeal against the amendment was lodged on 23 August 2007. It has been agreed that the appeal should be brought before the Special Commissioners.”
- The essential facts are that (1) pursuant to the Distribution Agreement the Halliburton Company distributed to its shareholders the shares in HIG and (2) pursuant to the Sale Agreement HHL (a second-tier subsidiary of Halliburton Company) sold the shares in Highlands Companies to HHUKL (a first-tier subsidiary of HIG). The Distribution Agreement was conditional, and the No Constraint clause (set out at paragraph 3(6)(f) above) provided that the satisfaction of the conditions did not create an obligation on Halliburton Company to effect the Distribution or limit that company’s rights to terminate the agreement and abandon the Distribution (section 9.01 provided that the Distribution Agreement could be terminated and the Distribution abandoned at any time prior to the Distribution Date by, and in the sole discretion of, the Board of Directors of Halliburton Company). As set out in paragraph 3(15) above, the Sale Agreement was conditional on “the Distribution…being effected pursuant to the Distribution Agreement.” The Distribution was effected at the latest by 8.30 am Houston time on 23 January 1996 (see paragraph 3(20) above), the stock certificates having been put in the United States mail addressed to the stockholders prior to 8.30 am on that day.
- The relevant statutory provisions of the Taxation of Chargeable Gains Act 1992 are as follows:
“18 Transactions between connected persons