Camas Plc v Atkinson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Patten |
| Judgment Date | 07 July 2003 |
| Neutral Citation | [2003] EWHC 1600 (Ch) |
| Docket Number | Case No: CH/2002/APP/0908 |
| Court | Chancery Division |
| Date | 07 July 2003 |
[2003] EWHC 1600 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Patten
Case No: CH/2002/APP/0908
Kevin Prosser QC and Julian Ghosh (instructed By Freshfields Bruckhaus Deringer) for the Appellant
Launcelot Henderson QC and Christopher Tidmarsh QC (instructed by the Solicitor of Inland Revenue) for the Respondent
Approved Judgment
Hearing dates: 20th 21st May 2003
I direct that pursuant to CPR PD 39A paragraph 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic|Mr Justice Patten
Mr Justice Patten :
Introduction
1. The issue for decision on this appeal is whether an investment company (as defined by ICTA 1988 s.130) is entitled to deduct the costs and expenses incurred in relation to the takeover of another company as “expenses of management” within the meaning of ICTA 1988 s.75(1), for the purpose of computing its liability to corporation tax. The expenses in question comprise some £583,495 of professional fees incurred in the company's accounting period to 31st December 1995. Apart from certain sums which were attributable to the cost of obtaining loan finance and therefore deductible under ICTA 1988 s.77, the Inspector refused to allow the deduction of these expenses from the total profits of the company for the relevant period and his refusal was upheld by the Special Commissioners.
2. The taxpayer company, Camas Plc (“Camas”), was incorporated on 21st February 1994 and is a listed company. At all times material to this appeal it was the owner of the whole of the issued share capital of Camas Holdings Limited, which in turn held the issued share capital of a number of subsidiary trading companies. The principal activities of these subsidiaries included quarrying, the manufacture of asphalts and pre-cast concrete products used in the construction industry, road-surfacing and associated services. It is agreed that the principal business activity of Camas consisted of holding, directly or indirectly, investments to produce income and/or capital growth, and that it was therefore an investment company within the meaning of ICTA 1988 s.130 at the relevant time. As of 31st December 1995 its investments comprised the whole of the issued share capital of Camas Holdings Limited, loans of some £68m, £18m and £1m to Camas America Inc., Camas Holdings Limited and Camas Overseas Investments Limited respectively, and cash at bank and in hand amounting to £10,221,000. For the accounting period ended 31st December 1995 its income consisted entirely of dividends and interest.
3. It is again common ground that the board of Camas was looking to acquire new investments in the same market sector as that in which the group operated. By limiting acquisitions to the same market, the board believed it could save costs and at the same time utilise its own management experience. In pursuit of this policy Camas, in about March 1995, identified Bardon Group Plc (“Bardon”) as a possible target for either merger or acquisition. Bardon was also a quoted company and fulfilled the investment criterion of operating in the same industry. It was approximately the same size as Camas and had a market capitalisation as at 1st April 1995 of £209m against that for Camas of £232m. It competed against the Camas Group in the Midlands and the North-west of England.
4. In their decision dated 30th September 2002 the Special Commissioners (Mr Stephen Oliver QC and Mr Adrian Shipwright) set out in some detail the various meetings and other events between April and December 1995 in connection with what became known as Project Bardon. In the light of their finding that all the expenditure in issue related to that project, it is unnecessary, I think, for me to do more than to summarise the various stages in the attempt to acquire control of Bardon. Ultimately no merger or acquisition took place, but as I shall explain later in this judgment, that fact in itself cannot alter the correct tax treatment of the relevant expenditure. It is also accepted by the Crown that, if completed, the acquisition of Bardon would have constituted an investment.
5. The first important meeting to discuss Project Bardon took place on 28th April 1995 between Mr Shearer, the Chief Executive of Camas, Mr Bailey, the then Director of Finance, and representatives of Schroders, who were the company's principal City advisers. At this meeting “substantial synergies” were identified between the two businesses, and Schroders presented various merger schedules indicating different ways in which an acquisition or merger could be effected. Following these discussions, re-run schedules were sent to Mr Bailey on 12th May 1995, containing a further range of scenarios. On 23rd August 1995 Mr Shearer had his first meeting with the Chief Executive of Bardon, Mr Tom. It was agreed at that meeting that the Chairman and Chief Executive of Camas and their counterparts at Bardon should meet the following week, early in September. At this meeting there was agreement that the “industrial logic” for a merger existed and was sound, but Bardon wished to review the matter in mid-September, because it anticipated that there would be a substantial rise by then in the Bardon share-price.
6. The board of Camas met on 14th September 1995, Mr Shearer reported on the progress of Project Bardon and indicated that there would be further discussion on the matter at a planning meeting to be held the following day. At the same meeting a paper from Schroders was presented, which made a comparison between the merits of a recommended offer and merger, and between a recommended offer and a hostile bid. On 29th September Schroders wrote to Camas advising that, for tactical reasons, Mr Shearer should make it clear to Bardon that a merger was the strongly preferred option. As it happened, the Bardon share-price fell from 34p on 14th September 1995 to 27p on 26th October. This was thought to offer a window of opportunity to Camas, and at a board meeting held on 26th October it was decided that an acquisition by recommended offer was preferable to the possibility of merger. A further meeting was arranged with Schroders for the following week and at the same time the board decided to instruct external advisers to commence what was described as “background technical work”. A paper on Project Bardon was to be prepared for consideration at the next board meeting, which was scheduled for 16th November.
7. The paper which was presented at this board meeting recommended that the acquisition of Bardon should be pursued, and the board of Camas supported this proposal. It was agreed that the Chairman and Chief Executive should meet their opposite numbers at Bardon on 20th November in order to discuss a recommended bid. It was thought that this could be at a price of about 40p per share. If agreement could be reached, then the proposal would be put to the Camas board for approval. If it was not possible to agree the terms of a recommended bid, then further advice would be taken about the possibility of making a unilateral bid for Bardon. Given that an offer by Camas for Bardon was now likely, each of the Camas directors received, at Schroders' request, a copy of a “Memorandum on Responsibilities of Directors” prepared by Schroders, which set out the principal responsibilities of the directors in the event of a public offer being made to acquire the Bardon shares. The memorandum dealt with such matters as Stock Exchange restrictions on share-dealings during the period of a bid.
8. The Chairmen and Chief Executives of the two companies met on 20th November, when Camas's representatives made it clear that they were no longer talking about a merger and hoped to be able to agree on a recommended offer. Price was discussed and the Chief Executive of Camas explained that a price in the range of 35/37p per share was appropriate. This is described in the minute of a later board meeting of 30th November 1995 as an “indicative offer”. The Bardon representatives said that their next board meeting was fixed for 14th December 1995 and that it was unlikely that the offer would be discussed by that board before then. Following this, the Chairman and Chief Executive of Camas met Schroders on 29th November. There was to be a board meeting the following day, and it was decided to seek the board's approval at that meeting for the making of what were described as “twin track” preparations, that would enable a bid to proceed on either a friendly or a hostile basis. These preparations would include approaching the banks on 1st December for finance for the acquisition and for subsequent working capital in relation to the combined groups. Bank financing of this kind was likely to take two weeks to put into place. These matters were reported to the Camas board the following day, when it was agreed that the Chairman and Chief Executive should meet with external advisers on the following day (1st December 1995) and that a further board meeting should be arranged for 7th December, to which the advisers would be invited.
9. The board meeting of 7th December was attended by Schroders, Warburgs (Camas's brokers) and Clifford Chance. Schroders presented a paper and the board resolved to continue with the progression of Project Bardon. The Chairman undertook to arrange a further meeting with Bardon, with a view to securing an agreed bid. The purpose of Schroders' paper, as set out on its opening page, was to brief the board prior to its deciding how to pursue the acquisition. This included a consideration of the circumstances in which Camas would be prepared to make a unilateral offer for Bardon...
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