Director and Employee Rights and the Grays Timber Case in the UK

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When structuring the share rights of employees and directors in a company or group that employs them, parties to these arrangements will be keen to ensure that any enhanced rights to payments on a share sale are structured in the correct way in order to avoid an income tax on the gain which could potentially mean 52% as opposed to a lower capital gains tax charge of up to 28%.

In the recent case of Grays Timber Products Ltd. v HMRC (Scotland) [2010] UKSC 4, specific arrangements were put in place between Grays Group and Mr Gibson, the managing director of Grays Timber Products Ltd. (“Timber Products”). In accordance with a subscription and shareholders agreement (“Agreement”), if certain conditions were met on a sale of a controlling stake in the parent company of Timber Products (“Parent”), Mr Gibson was contractually entitled to receive a disproportionate share of sale proceeds from the purchaser, greater than that realised by other shareholders. Put simply, Mr Gibson had an enhanced right to proceeds in the event of a sale as provided in the Agreement.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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