Untitled - David Kronemyer

In certain circumstances, where an acquisition qualifies for full merger accounting, no goodwill would
arise.
However, it is not always possible to structure acquisitions so as to take advantage of either merger relief or
merger accoundng. By way of exarnple, this would be the case following a successful share for share offer,
where a company acquires control of less than 90 per cent. of the target company. Furthermore, merger
relief would not be available where an acquisition is funded out of a company's cash resources.
Ihe Propoml
Under the Companies Act, a company may reduce or cancel its shafe premium account provided that it
obtains the approval of the shareholders in general meeting, separate approval of any class of shares whose
special rights are affected and the confrmation of the High Court. The amount by which the share
premium account is reduced then becomes a new and separate reserve against which goodwill can be
written off.
As a result of issues of shares at a premium oyer a number of years, the share premium account of the
company as at 31 March 1987 had fjsen to t282,24O,492. lt is now proposed that the company's share
premium account should be reduced by 9282 million, with the result that such sum would be credited to a
new reserve in the books of the Company ("the New Reserve").
In respect of each of the years ended 31 March 1986 and 31 March l9a7 the goodwill which arose on
consolidation as a result of acquisitions made during those years was written off against the profit and loss
account reserve. The aggregate amount of goodwill written off in respect of those two years was
approximately &29,OOO,OOO. It is now proposed that such goodwill be re-instated and written off against
part of the New Reserve, with the result that the profit and loss account reserve will be increased by the
amount which was formerly applied in writing off goodwill.
As to the balance of the New Reserye of approximately 5253 miltion, it is proposed that this should be
available for use in writing off goodwill which is likely to adse in the future. To put this figure in
perspective, the goodwill which arose on the acquisition of Rent-A'Center alone amounted to
approximately S3OO million. Your Diectors consider that a reserve of this arnount is necessary to assist the
Company in the pursuit of its acquisition policy because without it the need to write off goodwill in
relation to acquisitions where neither merger accounting nor merger relief is available could inhibit the
Company in relation to the size, structure and timing of acquisitions.
As mentioned abol/e, the reduction, to be effective, requires the sanction of the High Court. Having regard
to the rights attached to both classes of preference shares and the interests of creditors, the Company will
give an undeftaking to the High Court restricting the availability of the New Reserve to any use (apart from
writing off goodwill) to which share premium account could be applied.
It should be noted that the reduction of the share premium account will not result in any diminution in tfie
net assets of the Company, nor affect the ability of the Company to pay dividends.
To implement the proposal it is necessary for shareholders to pass a Special Resolution in General Meeting
and, in view ofa prohibition against reduction ofthe share premium account contained in the Company's
A-rticles of Association as part of the rights attaching to the Convertible Preference Shares, for the holders
of the Convertible Preference Shares to pass an Extraordinary Resolution at a separate CL$s Meeting. Your
Directors will then apply to the High Court for an Order confirming the reduction.
The proposal, which is expected to become effective towards the end of May 1988, will not a.ffect the
interests of creditors and it will not alter the authorised or issued share capital of the Company or the
proportionate voting rights of shareholders.