Camas Plc v Atkinson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Carnwath,Lord Justice Chadwick,The Vice-Chancellor |
| Judgment Date | 06 May 2004 |
| Neutral Citation | [2004] EWCA Civ 541 |
| Docket Number | Case No: C3/2003/1762 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 May 2004 |
[2004] EWCA Civ 541
The Vice-Chancellor
Lord Justice Chadwick and
Lord Justice Carnwath
Case No: C3/2003/1762
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE PATTEN
Royal Courts of Justice
Strand,
London, WC2A 2LL
Launcelot Henderson QC and Christopher Tidmarsh QC (instructed by the Solicitor of Inland Revenue) for the Appellant
Kevin Prosser QC and Julian Ghosh (instructed by Freshfields Bruckhaus Deringer) for the Respondent
Introduction
This is an appeal by the Revenue against a decision of Patten J. He decided that the taxpayer, Camas Plc ("Camas"), was entitled, in computing liability to corporation tax, to deduct certain expenses incurred in the accounting period to 31 st December 1995, as "expenses of management" within the meaning of ICTA 1988 s.75(1). He reversed the decision of the Special Commissioners (Stephen Oliver QC and Adrian Shipwright).
Camas Plc ("Camas") is the parent of a group of companies concerned mainly with quarrying and construction. At the relevant time it was "an investment company" within the meaning of ICTA 1988 s.130. Its income consisted entirely of dividends and interest. As part of its policy of acquiring new investments in the same market sector, the Bardon Group Plc ("Bardon") was identified as a possible target for merger or acquisition. Between April and December 1995, various activities took place, including board meetings of Camas, professional reports, and meetings with Bardon representatives, for the purpose of considering the merits of such action, and preparing for it. This process culminated in a conditional offer communicated to the Bardon board on 19 th December. On 21 st December, following the rejection of that offer by the Bardon board, the Camas board decided to take the project no further.
Heads of expenditure
The expenses at issue are the professional fees incurred in that period for financial, legal and accountancy advice. They totalled £583,495 (excluding VAT), all of which was charged to the profit and loss account in accordance with ordinary accounting commercial practice. They were made up as follows:
i) Schroders (£185,000). These fees related to their work as the financial adviser to Camas in respect of the takeover, including advice on strategy and tactics, the formulation of alternative strategies in relation to a possible merger or a takeover, methods of financing any offer, and appraisal of the financial impact of successful offers for Bardon. They also attended board and other meetings and prepared papers for them.
ii) Warburgs (£25,531). They acted as brokers, gave advice on strategy, and carried out analysis of the register of Bardon shareholders.
iii) KPMG (£226,684). They carried out a comparison of the financial performance and accounting policies of the Camas and Bardon groups, a review of the benefits of integrating the two businesses, and a review of the profit forecast for the Bardon group. They also carried out an assessment of the borrowing requirements in the event that the takeover offer succeeded.
iv) Clifford Chance (£121,753). They gave legal advice on the impact on the proposed transaction of competition laws, on the information to be submitted to the Office of Fair Trading, and on the information that would require to be included in any circular. They also gave advice to the directors of Camas on their responsibilities under the City Takeover Code and the Stock Exchange Yellow Book. Together with Schroders and Warburgs they attended a number of board meetings.
v) Shearman & Sterling (£11,878). They advised on US anti-trust issues and provided an analysis of the impact of US securities laws.
vi) FPC Greenaway (£12,649). As printers, their services related to printing the offer documentation, listing particulars, circulars to shareholders and some press releases.
A proportion of the fees of Schroders (£40,000) and Clifford Chance (£33,800) was accepted by the Revenue as the incidental costs of loan finance (allowable under ICTA s 77). Otherwise, no distinction has been drawn by either side between the different heads of expenditure. The balance in dispute is therefore £509,695.
The sequence of activities
The Commissioners made detailed findings as to the sequence of work and meetings, which were summarised by Patten J. It is sufficient to quote his account of the conclusion of the process:
"On 19 th December Schroders faxed to Barclays De Zoete Wedd, the merchant bank which was acting for Bardon, a letter confirming an offer by Camas of 40p per Bardon share, with a partial cash alternative 'subject to joint analysis of potential synergies and due diligence'. The following day, the Offers Committee met on two occasions. At the first meeting a final draft of the facility agreement was produced, and it was resolved to proceed with the establishment of banking facilities on the basis of that agreement. At the second meeting, held later in the afternoon, the committee reported that the facility agreement had been finalised for execution, and it was resolved to approve it in its final form.
At 1.30pm on 20 th December the Bardon board met to discuss the Camas offer, which had been faxed by Schroders the previous day. The Chairman was authorised to respond by rejecting the offer on the basis that it was inadequate in value and that the board of Bardon did not believe that the record of Camas's management demonstrated that it would be able to achieve the purported synergies or lead a merged group to further growth. This decision was communicated to Camas later the same day. This led to a meeting of the Camas board the following day, 21 st December, at 10am. Following an update on events and discussion and advice from Warburgs and Schroders, it was decided that there was no possibility of a recommended bid at a price which Camas would be prepared to offer, and that 'the success of a unilateral bid was too uncertain to warrant proceeding'. Project Bardon therefore came to an end."
Before the Commissioners, Camas relied on an expert report by an investment banker, Mr Reed, which was accepted by the Commissioners, as to the complex process of preparation required in such cases:
'3.3 A strict timetable must be followed once a firm intention to make an offer is announced. Also, if the offeror and the target company are public companies, both are vulnerable to approaches from other offerors once an announcement of a firm intention to make an offer has been made. Speed in launching and completing an offer is, therefore, of utmost importance and this requires the prior contingent preparation of documentation.
3.4 The net effect is that considerable preparation is required before contemplating a public offer. This is to ensure that the largely irreversible offer process is not put in train until the offeror has completed its appraisal process and is certain that it wishes to make the offer and that the necessary documentation is sufficiently advanced so that, once implemented, the offer process can be executed as quickly as possible.
3.5 The offer process therefore essentially consists of three steps:
(a) the appraisal process;
(b) the decision whether or not to make an offer; and, if positive,
(c) the communication of this decision to the offeree.
Market circumstances can change very rapidly and very little time will usually elapse between decision and communication…."
In his report, Mr Wood also commented on the stage which the process had reached in this case. (Although not quoted by the Special Commissioners, I do not understand this part of his report to be contentious.) He described the "proposal" made to Bardon on 19 th December as "the key significant step" prior to abortion of the project:
"The Proposal certainly did not constitute an offer by Camas for Bardon because of the preconditions it contained. Schroders made it clear that prior to any offer being made, a meeting would need to be held subsequent to 2 January 1996 at which the Chief Executives of Camas and Bardon would need to conclude that putting the two companies together would lead to identified annual synergies of at least £10million…. Once this meeting had taken place, it was envisaged that Camas would undertake a due diligence exercise on Bardon which it was expected that Bardon would want to reciprocate."
He re-emphasised the "very sharp distinction" to be drawn "between a company communicating a firm intention to make an offer and the steps which lead up to this", and added:
"If the Proposal had contained a firm unconditional intention from Camas to make an offer, an announcement would have had to have been made by Bardon immediately following its board meeting, whether or not the Bardon Board decided to recommend the offer."
The Commissioners accepted that the object of the expenditure, viewed as a whole, was to take Camas, as potential offeror, through the three steps referred to in this report. They concluded:
'50. Relevant to the present issue we find that all the expenditure in issue here related to Project Bardon in the sense that it concerned the proposed merger with or acquisition of the whole of the issued share capital of Bardon, the means of achieving that result and whether or not to proceed with the bid. No other proposed mergers or acquisitions were under serious consideration in the period of Project Bardon.
51. We find also that the costs relating to Schroders, Warburgs, KPMG, Clifford Chance and the US lawyers were incurred, in part at...
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