Untitled - David Kronemyer

Share Premium Account
where a company issues shafes ar a value which represents a pfemium over theif nominal value, the
premium musi generally, under the Compani€s Act, be transferred to a share premium account. Under the
tompanies Act,ihe uses to which the share pr€mium account can be put are very restricted and the account
cannot be used for writing off Soodwill.
If an acquisition is mad€ v/holly or partly for shares and certain specific conditions are met, the Companies
Act proyides relief from the need to create a share premium account (known as 'merger relief). Under these
provisions the premium may be tak€n to a merger reserve against which any goodwill arising may be written
off. Merger relief was available in connection with the acquisition of Rent-A-Center and the premium was
taken to a merger res€rve against which the goodwill has been applied.
In cefiain circumstances, an acquisition may qualify to be accounted for as a merger under the provjsions
of Statem€nt of Standard Accounring Practice No. 23 and were advantage to be taken of those Provjsions
no goodwill would arise.
However, it is not always possible to structure acquisitions so as to take advantage of either mer{aer relief
or merg€t accounting. By way of example, 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.
The Proposal
Under the Companies Act, a company may reduce or cancel its share premium account provided that it
obtains rhe approval of the shareholders in general meeting, separate approval of any class of shares whose
special rights are affected and the confirmation ofrhe 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 over a number of years, the share premium account of the
Company as at 31 March 1987 had risen to 5282,240 ,492. lt is now proposed that the Company's share
premium account should be reduced byS282 million, with the result that such sum would be credited to
a new reserye in the books ofthe Company ("the New Reserve").
In respect of each of the years ended 31 March 1986 and 31 March 1987 the goodwill which arose on
consolidation as a result of acquisirions made during rhose years was written off against the profit and loss
account reserve. The aggregate amount of goodwill written off in respect of those two years wa5
approximately.L29,000,000. Ir is now proposed rhat 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 Reserve of approximately 52 53 million, it is proposed that this should be
available for use in writing off goodwill which is likely to arise in the future. To put this ligure in
pefspective, the goodwill which arose on the acquisition of Rent-A-Center alone amount€d to
approximatelyS3OO million. Your Directors consider that a reserve of this amount is necessary to assist the
Company in rhe pursuit of its acquisition policy because withour it the need to write offgoodwill in relation
to acquisitions where neither merger accounting nor merger relief is available could inhibit the Company
in relation to the size, structur€ and timing of acquisitions.
As mention€d above, 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 undertaking to the High Court restricting the availability of the New Reserve to any use (apaft from
writing off goodwill) to which the share premium account could be applied.
It should be noted rhat the reduction of the share premium account will not result in any diminurion in
the 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 of a prohibition against reduction of the share premium account contained in the Company's
Articles ofAssociation as part of the rights attaching to the Convertible Preference Shares, for the holders
of the Convertible Preferenc€ Shares to pass an Extraordinary Resolution at a separate Class 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 middle ofJuly 19a8, will not affect the
interests of creditors and it will not alter rhe authorised or issued share capital of rh€ Company or the
propoftionate voting rights of shareholders.