CFM50800 - Derivative contracts: exclusions from regime: equity derivatives: condition D

Contracts to buy or sell a substantial shareholding

»Ê¹ÚÌåÓýapp acquisition of a company, or a significant stake in a company, may involve a put or call option over shares in the target company, or a contract that meets the statutory definition of a ‘futureâ€�. In many cases, such contracts will not be accounted for as derivatives, and will therefore fail the test in CTA09/S579.

CTA09/S591(5) ensures that, even if this is not so, such contracts will generally not be treated as derivative contracts. This provision was added to the derivatives contract legislation by SI 2006/3269, and applies from 30 December 2006 in relation to accounting periods ending on or after that date.

»Ê¹ÚÌåÓýapp exemption applies where the relevant contract is an option to acquire shares in a company, or a future requiring delivery of such shares. »Ê¹ÚÌåÓýapp shares in question must constitute a ‘substantial shareholdingâ€�, as defined at TCGA92/SCH7AC/PARA8 (see CG53072), or would be a substantial shareholding if they are actually acquired or delivered.

»Ê¹ÚÌåÓýappre is no requirement for shares to actually change hands. »Ê¹ÚÌåÓýapp option or future may allow cash settlement as an alternative to shares being delivered. »Ê¹ÚÌåÓýapp ‘condition Dâ€� exemption will still apply if the company takes the cash settlement route.

Two further conditions need to be satisfied:

  • As with other exemptions in S591, the company must have entered into the contract otherwise than in the course of activities integral to a trade.
  • And the option (or future) must not be an embedded derivative.

This means that where a company holds a convertible or exchangeable security, the embedded derivative is not taken out of Part 7 by CTA09/S591(5), even if the conversion shares would constitute a substantial shareholding.

An option to buy or sell shares in a company will be an ‘asset related to shares� as defined at TCGA92/SCH7AC/PARA30 (CG53010), and where such an option is excluded from Part 7 CTA09, it will generally come within the scope of the substantial shareholding exemption.