CFM96260 - Interest restriction: related parties: 25% investment - attribution of rights and interests: qualifying arrangement

TIOPA10/465(7)-(10)

The definition of 25% investment looks at the level of investment P has in an entity. This does not just include rights and interests held solely by P, however, and also takes into account rights and interests held by certain other people which are attributed to P.

A qualifying arrangement is one of three ways in which rights and interests are attributed to P. Under this rule, P is also taken to have all the rights and interests of one or more third parties with whom P has entered into a qualifying arrangement in relation to U.

Qualifying arrangement

P will have a qualifying arrangement with one or more third parties if they are party to an arrangement concerning U as a result of which, by reference to shares are held (or to be held) by one or more of them in U, they can reasonably be expected to act together to either:

  • Exert greater influence in relation to U than any one of them would be able to exert if acting alone, or
  • Achieve an outcome in relation to U that, if attempted by any one of them acting alone, would be significantly more difficult to achieve.

The reference to shares in U includes shares that may be held as a result of the exercise of any right or power, and includes rights or interests in U that are of a similar character to shares.

‘Arrangement’ is taken to mean any agreement, understanding, scheme, transaction, or series of transactions.

A collective investment scheme is unlikely  to constitute a ‘qualifying arrangement’ and so a participant in a scheme should not be attributed the rights and interests of other participants.  

In some cases, a company may be participating in a scheme of arrangements under Part 26 of the Companies Act 2006, for example, where it is unable to pay its creditors. This does not automatically lead to the conclusion that there is a qualifying arrangement within the meaning of S465. Each arrangement should be assessed based on the specific facts and circumstances of the transactions.

Example

Five investors come together to take control of a company, with each investor taking a stake below 25%, splitting their investments between debt and equity in differing proportions. Each of the five investors has entered into a qualifying arrangement because they can reasonably be expected to act together so as to exert greater influence over the company than any of them could have exerted acting alone.

Each investor is therefore taken to have all the rights and interests of the other investors.