Jefferson Smurfit Shares CGT

Capital gains tax implications for holders of Jefferson Smurfit Group plc shares on the takeover of the company by MDCP Acquisitions Limited.

Introduction

MDCP Acquisitions Limited (“MDCPA”) acquired Jefferson Smurfit Group plc (“JSG”) shares in a takeover of that company by means of the following series of transactions:

• The Share Split
  JSG subdivided each of its issued Ordinary €0.30 shares into 10 Ordinary €0.03 shares (the “share split”).
• “Spin off ” of SSCC Shares
  In a court approved capital reduction, JSG’s shareholding in Smurfit Stone Container Corporation (“SSCC”) was cancelled and new SSCC shares were issued directly to JSG’s shareholders (“the spin-off ”). JSG shareholders received 1 common share in SSCC for every 16 Ordinary €0.30 shares held before the 10 for 1 split.
• Cancellation of Shares
  In exchange for the SSCC shares spun off and to complete the capital reduction, JSG cancelled 4 out of every 10 Ordinary €0.03 shares held after the split.
• Acquisition by MDCPA (“the offer”)
  MDCPA then acquired the remaining JSG shares as follows: * A cash payment of €2.15 for each JSG share held before the share split or * Loan notes of €l.00 per €1.00 of cash consideration to which they were entitled or * A combination of cash and loan notes at the choice of the shareholder.

An individual who was tax resident or ordinarily tax resident in Ireland at the time of the takeover is subject to Irish capital gains tax in the 2002 tax year on any gain arising on the disposal of JSG shares pursuant to the ‘spin off ’ and the offer.

The Share Split

The share split is considered a reorganisation under Section 584 TCA 1997 and is therefore not considered a disposal for capital gains tax purposes. JSG shareholders are treated as if they acquired their shareholding of ten new JSG Ordinary €0.03 shares on the same date and at the same cost as when they acquired their original JSG Ordinary €0.30 share.

“Spin off ”of the SSCC Shares

The “spin off ” of SSCC shares was payment for the redemption, repayment or purchase of its own shares by JSG in accordance with the proposed scheme of capital reduction and Section 175 TCA 1997 applies.

On receipt of the SSCC shares a part disposal arose to JSG shareholders. Section 547(1)(b) TCA 1997 deems the consideration received in respect of the part disposal to be equal to the market value of the SSCC shares received by the shareholder on 3 September 2002, the date the offer was declared unconditional. Revenue accept that the market value of SSCC shares on this date was €l3.67 i.e. US$13.6101 converted to Euro at the exchange rate prevailing at 4.30pm on 3 September 2002 of €1 = US$0.9959

1. The SSCC Formula

Sale Proceeds

Value of SSCC shares received =

Less Base Cost (indexed if appropriate)

* The base cost of an individual’s JSG holding must be attributed to each individual tranche of shares purchased taking account of the impact of any rights, bonus and scrip issues taken up on the holding.

The acquisition by MDCPA

Cash

The acceptance of the cash offer for the remaining JSG shares held following the capital reduction constitutes a disposal of those shares giving rise to a capital gains tax charge on the difference between the cash received and the base cost attributable bearing in mind that a portion of the base cost will have been allocated for CGT purposes against the part disposal arising on the ‘spin off ’ of the SSCC shares.

2. The Cash Offer Formula

Sale Proceeds

Less Base Cost (indexed if appropriate)

* The base cost of an individual’s JSG holding must be attributed to each individual tranche of shares purchased taking account of the impact of any rights, bonus and scrip issues taken up on the holding.

Loan Notes

An exchange of JSG shares for an element of loan notes [MDCP Acquisitions I - Floating Rate Guaranteed Unsecured Loan Notes 2007] will not be treated as a disposal for capital gains tax purposes under Section 584 TCA 1997. No chargeable gain will arise until such time as the loan notes are transferred, disposed of or redeemed. The base cost attributable to the loan notes will be the portion of the original base cost of the JSG shares relating to the holding not disposed of on the distribution of the SSCC shares, i.e. the appropriate proportion of “C” above (see The Cash Offer Formula). The loan notes are deemed to have been acquired on the same date as the acquisition of the original JSG holding.

Cash and loan notes

Where an individual elected to receive a combination of cash and loan notes, CGT will be payable on the cash element. As outlined above, no chargeable gain arises in respect of the loan note element until such time as the loan notes are transferred, disposed of or redeemed. The calculation will take account of the value of loan notes received in order to ascertain the appropriate base cost attributable to the cash element.

3. The Loan Note And Cash Offer Formula

Sale Proceeds

Less Base Cost (indexed if appropriate)

* The base cost of an individual’s JSG holding must be attributed to each individual tranche of shares purchased taking account of the impact of any rights, bonus and scrip issues taken up on the holding.