COMMENT: Sour taste from Kerry Co-op share redemption plan

Kerry Co-op Ltd (Kerry Co-operative Creameries Ltd) has held a number of meetings in the last week regarding the proposed redemption of co-op shares.

Many Kerry suppliers and indeed former suppliers were shareholders in the original Kerry Co-op and of course may also hold shares in Kerry Group plc.

Over the years the ownership of Kerry Co-operative has become more diluted vis a vis members who are no longer active farmers.

The dilution of the members of the co-op has typically arose where farmers may simply have stopped farming and leased out their land or where the farmer dies and leaves their shares to other family members no longer involved in farming or where the farmer retires are retains ownership of his shares with the successor not becoming a shareholder of the co-op.

Kerry co-operative — and indeed many members — want to offer a scheme to allow members access the value of their shares.

Typically co-operatives all around the country tend to have redemption funds to allow the co-op repurchase shares from any inactive or deceased members.

For most co-ops, shares are redeemed at their nominal value, usually €1 per share. The advantage to the co-op and to existing members is that by redeeming shares the ownership of the co-op will be concentrated amongst active farmer suppliers, which in turn coincides with the stated objectives of most co-ops.

A private “grey” market has been operating but shareholders have typically not received full value for their shares and sellers are dependent on other private individuals to buy their shares.

The value of Kerry Group PLC has risen dramatically with the share price rising meteorically from €19 per share in 2008 to a current value of about €106 per share.

From humble beginnings in 1986 the plc has risen in value to a company with a market capitalisation of a whopping €18bn as of last week.

Kerry Co-op has a 13.6% share in the PLC meaning the value of the PLC shares owned by the co-op exceeds €2.5bn.

It is estimated that the value of each co-op share is exceeds €600 based on the value of the PLC.

The issue for the co-op is that redeeming the shares is very expensive work — to buy back just one share from a non-active supplier would cost €600 at these prices.

It is estimated that there at over 13,300 shareholders who together have an average value tied up in the PLC of over €180,000 each.

To make any meaningful dent in reducing the number of inactive shareholders the co-op is proposing to sell PLC shares in order to provide funds for the redemption.

From a tax perspective, the default position is that the payments by a company to its shareholders for the purchase of its own shares is treated as a distribution, meaning such payments are treated as income for income tax purposes — no differently than, say, dividend income.

The reason behind this rule is simple — imagine a private individual owns 100 shares in his own company — rather than taking a dividend each year which would be subject to income tax, he or she instead sells one share per year back to his/her company which is in turn cancelled and treats each sale as a capital gain liable to tax at 33%.

Although the person loses one share per year, effectively they will still own 100% of the company — i.e. after the first year they own 99 shares of a total of 99 shares in issue (the redeemed share having been cancelled).

Kerry, Global Technology and Innovation Center, Kildare
Kerry, Global Technology and Innovation Center, Kildare

If the tax rules did not stipulate that the redemption of shares is by default an income tax event, then every Tom, Dick and Harry would very quickly be redeeming shares in their own companies and thereby avoiding income tax upon the extraction of profits instead opting for the more preferential capital gains tax treatments.

Historically, in Ireland, we have had precedent of shares in PLCs being transferred to co-op members in exchange for parting with Co-op shares — so called spinouts.

Unfortunately, it seems the door is closed to allow Kerry Co-op swap PLC shares for its co-op shares on a tax neutral basis — a so-called paper for paper exchange.

This is because it is reputed that Kerry Co-op no longer satisfies the criteria of having at least 50% of its members involved in husbandry as required by Section 133 of the Taxes Acts.

The fact that members will face tax rates of up to 50% on a deemed distribution arising from the redemption of shares will definitely leave a sour taste.

What is agreed is that members of the Co-op should be allowed some mechanism to access the value of their shares.

Whether the current scheme will be rejected or whether some alternative mechanism can be found even if that requires legislative changes remains to be seen.

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