Innovative solvent liquidation by Gibson Hewitt is music to the ears of investors


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In early 2009, Gibson Hewitt were instructed to conduct a solvent liquidation (“MVL”) of a Venture Capital Trust, (“VCT”).  For anyone unacquainted with VCTs, imagine a managed fund invested across a variety of “Dragons Den” type start-ups.  Whilst the fund will have some inevitable failures and losses, the tax advantages combined with the occasional star investment can make it an appealing prospect for high net worth individuals.

The VCT in question had reached the end of its life and Gibson Hewitt worked in coordination with the fund managers to realise its 14 investments.  The VCT had 516 shareholders, (the investors), amongst whom the proceeds from the realisations were split in proportion to their respective original investments.

The preferential tax status of a VCT expires 3 years following the liquidation.  Therefore, it was important to realise as many investments as possible by April 2012.  By the end of the liquidation, over £2M had been paid to investors net of costs.

However, one investment, Audio Network Limited, (“AN”), was considered a future star.  AN was already declaring dividends and had a rising value which warranted an innovative solution so the VCT investors could retain the shares and benefit from any future price rises.  For those unfamiliar with AN, think of twist on the iTunes concept where the customers are advertisers, film makers etc rather than the general public.

In 2005, the VCT had purchased a minority stake in AN at a price of 30p per share.  By 2012 the value of the (unlisted) shares was estimated at £2 each.  The price appeared to be heading further upwards and the VCT investors were keen to benefit.  The fly in the ointment was a strict limitation on the number of AN shareholders which prevented Gibson Hewitt from simply distributing the AN shares amongst the VCT shareholders.

A solution was formulated whereby Gibson Hewitt formed a nominee holding company, (“GHN”).  In March 2012 and before the loss of special tax status, the VCT’s shares in AN were distributed in specie to GHN.  GHN then operated as a trust holding company for the VCT shareholders.  The advantage of this solution was two-fold.  Firstly, those VCT investors who thought the AN shares would continue to rise had the option to hold.  Secondly, the base cost for those shares, (for CGT purposes), was £2 rather than the original 30p.

In the intervening years, the GHN shareholders were given various opportunities to sell at a progressively increasing price which had risen to £5 per share by the end of 2017.  Many decided to crystallise their profits but some elected to hold.

In late March 2019, we were contacted by AN about a potential sale of AN as a whole.  This deal completed during April valuing AN at a total of $215million.  This equated to an exit share price of around £10.56 per AN share or a 35 fold return on the VCT’s original investment!

If you appreciate an Insolvency Practitioner who is open to innovative solutions, contact Gibson Hewitt.  Lynn Gibson can be contacted on 01932 336149 and the first meeting is free.

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