Greymouth Holdings Limited v Jet Trustees Limited
This is an interesting little case out of the High Court involving a shareholder dispute between three different parties. Court orders were made in 2013 requiring the group 2 shareholders to effectively sell their shares to the other shareholders but in actual reality the order was made to sell the shares back to the company itself.
What is interesting with the case is not the legal dispute, but it highlights a fact that we have seen before. Often in litigation between commercial parties, where settlement is made, the transferor of shares often executes an agreement stating that they will transfer them to the transferee or their nominee. Often the transferee will attempt to have these shares repurchased by the company but the consequence of this is that the transferor is deemed to receive a dividend which is taxable.
This would mean that the transferor is taxed on the share consideration and it is no longer a capital gain. Naturally this reduces the net consideration received.
In the Greymouth Holdings case the court found that its orders were explicit that the fair market value was to be paid but this included the resident withholding tax, ie it was not Fair Market Value plus RWT. There was no other right of set up or lien.
Accordingly, when dealing with sales of shares and in particular commercial disputes between parties which are settled, ensure that any nomination clause excludes the repurchase by the company itself.