PDMR Capital Gains Tax planning and Model Code implications
In the light of forthcoming changes to Capital Gains Tax (CGT) rules, the UKLA helpdesk has received a number of queries about whether certain so-called 'bed and breakfast' share dealings by some directors would breach the Model Code (Annex 1 to Listing Rules Chapter 9).
We understand these dealings will involve the sale and subsequent re-purchase of directors' holdings, with the re-purchase occurring not less than 30 days later. We have been asked whether such dealings would breach paragraph 8 (b) of the Model Code which prohibits listed companies giving clearance to deal 'on considerations of a short term nature'.
The intention of the Model Code is to ensure that persons discharging managerial responsibility (PDMRs) do not abuse, and do not place themselves under suspicion of abusing, information that they may be thought to have, especially in periods leading up to the company announcing its results. Paragraph 8 (b) of the Model Code should be seen as preventing investment strategies that may be designed to take advantage – or perceived as taking advantage – of short-term price movements in the company's securities.
We remind issuers and their PDMRs who may be contemplating particular transactions in relation to CGT planning of the need to comply with their obligations under the Model Code, Chapter 3 of the Disclosure and Transparency Rules, as well as our other requirements such as the Code of Market Conduct.
In our view, a person should only consider giving clearance under the Model Code for bed and breakfast transactions if they are satisfied that:
- clearance for the transaction is not given in a prohibited period or when the PDMR was otherwise precluded from dealing; and
- having considered the nature of the specific bed and breakfast arrangements and the surrounding circumstances, there is no potential for them being for an abusive purpose or being viewed as possibly being for an abusive purpose. In particular, arrangements should be made so that the transaction is closed-ended with the terms of the re-purchase being fixed at the time of the sale. So it would not matter if the re-purchase took place during a prohibited period.
Separately, issuers need to give careful consideration to related disclosure issues. For example, how would issuers disclose the transaction to the market in a way that it will not be misled about the transaction’s nature and purpose and will know that the transaction was undertaken for CGT reasons, with the sale to be followed by a re-purchase?
It is for issuers, PDMRs and their respective advisers to satisfy themselves that any prospective share dealings for CGT planning purposes will meet these criteria. We do not sanction or legitimise individual share transactions undertaken or proposed by PDMRs, nor comment on matters outside our jurisdiction, including issues arising from changes in CGT legislation.
