Q&A

Dominic Coyle answers your financial questions

Dramatic effect of 'going private'

Can you explain for me the implications of a company "going private" and what are the options for shareholders if the troubled Waterford Wedgwood takes this route?

L.O'S., Dublin

The issue of companies going private is extremely topical at the moment with several potential suitors circling the Jurys Doyle hotel group. Among these is a consortium of investors called Precinct, which previously acquired and took private the Gresham Hotel group. That left Jurys Doyle as the only publicly listed hotel group in Ireland and its delisting - should one of the circling developers eventually buy the group - would leave a significant sectoral gap in the opportunities for investors in the Dublin market. But, from the shareholders' perspective, what are the implications of a company going private? Pretty dramatic actually. In most cases, the effect of a company "going private" is that the shareholders who invested in the company as a public entity are bought out, whether they want to or not.

The key target for any bidder is control over 80 per cent of the stock of the company, as was evident from the summer's controversial campaign by the American Glazer family for control of Manchester United. The significance of the 80 per cent threshold is that a buyer can then compulsorily acquire the shares of outstanding shareholders.

That is not generally good news for the shareholders as companies finding themselves the subject of such buyouts are generally ones whose share price has underperformed in the recent past. As a result, the shares may well be trading far below the level at which most private investors acquired them. Even with the premium over the current trading price offered by a potential buyer, many shareholders will be facing a loss on their investments in these situations.

This is not the case with Jurys, which seems simply to have fallen victim to the appetite for prime building land among Irish developers. However, it is very much the case for Waterford Wedgwood, which you mention in particular. The giftware group has been a shareholder's nightmare in recent years, eventually withdrawing even the limited compensation of an annual dividend.

So what are the options for shareholders? I'm afraid they are limited. They can, of course, refuse to sell their shares and hope that enough people do so for any bid to fail to attain the 80 per cent threshold. However, that can be a double-edged sword as, in the same way that a share price can rise in anticipation of a bid, a failed bid can trigger a precipitous decline in stock value.

Generally, small investors have little chance of preventing the attainment of the 80 per cent threshold, as Manchester United fans discovered, as this is almost certain to be the case with Waterford Wedgwood where the dominant shareholders - the family interests of Sir Anthony O'Reilly and his brother-in-law Peter Goulandris - hold more than half the stock already as a result of recent rights issues.

Refusing to surrender your shares once they are liable for compulsory acquisition is self-defeating as some former Eircom shareholders found when they tried it. Once an offer goes unconditional (it has passed the 80 per cent mark) the buyer can apply for the shares to be delisted. At that stage, you are holding worthless paper.

Worse still, if you do not surrender your shares at that point for repayment under the terms of the successful bid, the company can, after a certain point, charge you for the administration involved in the exercise, as happened with Eircom. On occasion, a private buyer will allow existing shareholders to convert some of their public stock for a (generally smaller) stake in the private company on top of any cash payment. While this can allow shareholders to share in any subsequent recovery in a company's fortunes, they will generally find themselves with fewer rights and less transparency.

Capital gains

Seventeen years ago my brother and I were left a house in the country in our uncle's will. My aunt was given right of residence in the house and has died recently. Would we be liable for capital gains tax on any of the proceeds as we are in the process of selling the house?

I am a PAYE worker and my brother is self-employed.

Mr G.K., e-mail

It sounds as though you will have exposure to capital gains tax. Essentially, the house would have been transferred to you unencumbered by capital gains as part of your uncle's inheritance. There might have been capital acquisition tax implications - but that's a different story. Essentially, you and your brother have owned the house as a second property in the interim. You will be able to claim indexation to compensate for the effect of inflation on the value of the house between the time you "acquired" it and the end of 2002 when indexation was scrapped.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 10-16 D'Olier Street, Dublin 2 or by e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering questions. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.