A new UK regulatory framework and trading venue, is creating potential to provide liquidity for some shareholders without requiring families to surrender long-term control of the enterprise. But many businesses may need to reorganise to effectively seize these opportunities.

Many UK family businesses use “capital reduction demergers” to separate operating businesses from property, investment assets and other family wealth before making equity available to employees or external investors. Businesses that are making these changes are the same that might benefit from what is called PISCES, aka Private Intermittent Securities and Capital Exchange System. PISCES is a new UK regulatory framework and secondary trading venue. It allows private companies to trade their existing shares via auction windows without having to hold a full IPO. PISCES was launched to exploit rising demand for investment access into non-publicly traded firms.

To address this issue of UK demerger rules and how they fit with the new landscape is Rosalyn Breedy (pictured below), a founder of Breedy Henderson, a London-based legal and advisory firm. (More details on the author below.) 

The editors are pleased to share these insights; the usual editorial disclaimers apply. To comment, email the editors at tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Rosalyn Breedy


HM Treasury is consulting on changes to the UK's demerger rules. One option under consideration is to move away from capital-reduction demergers and place greater reliance on statutory demergers.

At first sight, that may appear to be a technical tax reform. It could have significant implications for family-owned businesses considering succession planning, shareholder liquidity and future investment.

Capital reduction demergers are one of the principal mechanisms that families use to separate operating businesses from property, investment assets, surplus cash and other family wealth accumulated over many years. Statutory demergers are generally more limited and are often better suited to separating one trading business from another.

That distinction matters because many family enterprises are not structured as simple trading groups. Successful businesses frequently sit alongside investment property, legacy assets, family investment vehicles and non-core holdings. Before introducing investors, considering employee ownership or creating liquidity for shareholders, families often want to reorganise those assets into a structure that more accurately reflects their long-term objectives.

At the same time, the government is promoting PISCES as a framework for periodic trading in private company shares. For family businesses, PISCES has the potential to provide liquidity without necessarily requiring a sale of the entire business. It may also support succession planning, employee participation and access to growth capital.

I have written and spoken previously about the opportunities PISCES may create for family-owned businesses. One of its most attractive features is the potential to provide liquidity for some shareholders without requiring families to surrender long-term control of the enterprise.

The difficulty is that many businesses may need to reorganise before they can take advantage of those opportunities effectively.

If capital reduction demergers become less accessible, some families may find it harder to separate family wealth from operating assets before undertaking a liquidity event. That could complicate efforts to make shares available to employees or external investors on terms that are commercially sensible and easy to understand.

This is not simply a family business issue. Wealth managers, family offices and private client advisors regularly help families distinguish between business risk and long-term family wealth. Structural flexibility is often an important part of that process. A narrower demerger regime could therefore have consequences well beyond the tax technicalities.

The policy question is straightforward.

If the government wants more private companies to use PISCES as a source of liquidity and long-term growth capital, should it also preserve practical restructuring mechanisms that allow family businesses to prepare themselves for that market?

Simplification is welcome. But simplification should not remove one of the tools that many family businesses rely on when planning succession, governance and shareholder liquidity.

As the consultation progresses, it would be worth considering whether demerger reform and PISCES are being viewed in isolation when, for many family businesses, they are likely to form part of the same ownership journey.

References 

-- HM Treasury / HMRC consultation: Modernising the taxation of distributions and repayments of capital from companies https://www.gov.uk/government/consultations/modernising-the-distributions-framework/modernising-the-taxation-of-distributions-and-repayments-of-capital-from-companies--2

-- HM Treasury / HMRC consultation landing page: Modernising the distributions framework https://www.gov.uk/government/consultations/modernising-the-distributions-framework

About the author
Rosalyn Breedy founded Breedy Henderson, a London-based legal and advisory firm specialising in ownership, governance and capital solutions for family offices, family enterprises, founders and investors.

Recognised as a Band 1 lawyer by Chambers & Partners, Breedy advises on family office structuring, family investment companies, investment funds, financial services regulation, private capital transactions, succession planning and governance matters. 

With a background in investment banking and private markets, Breedy is an experienced advisor to family offices, fund managers, entrepreneurs and private companies. She is a frequent commentator and speaker on family capital, governance, ownership and developments in UK private markets. Breedy is a Freeman of the City of London and a member of the Integrity and Ethics Advisory Board of the Chartered Institute for Securities and Investment.