Corporate Venturing

The investing company

To qualify for the CVS, the investing company must not be party to any reciprocal arrangements for the purchase of shares in any other company. In addition, throughout the qualification period related to the relevant shares it must

• not own more than 30% of the issuing company (the 'no material interest' requirement)
• not control the issuing company
• exist to carry on one or more non-financial trades, or be a member of a non-financial trading group and exist to carry on a non-financial trade or trades, or businesses other than trades; or be the parent company of such a group.

These rules ensure that investment relief is given only to companies making minority investments in independent companies, and not to companies and groups already making equity investments as part of their financial business.

The 'no material interest' requirement

Throughout the qualification period, the investing company must not possess, directly or indirectly, or be entitled to acquire, more than 30% of either

• all of the issued share capital, other than certain types of preference shares (relevant preference shares), together with any loan capital which is convertible into ordinary share capital of the company or of any subsidiary, or
• the voting power in the company or any subsidiary.

The 30% limit is applied to the combined shareholdings of the investing company and any other companies connected with it or associated with any of them. If the shareholding exceeds the limit, the investment does not qualify for any investment relief, and any relief already given will be withdrawn.

The 'no reciprocal arrangements' requirement

Investment relief is not available if the subscription for shares is part of any arrangement involving another person subscribing for shares in a 'related company' (except where the arrangements consist of an issuing company subscribing for shares in any of its qualifying subsidiaries). A 'related company' means any company in which any person who is a party to the arrangements has a material interest.

The 'no control' requirement

An investing company does not qualify for investment relief if, at any time during the qualification period for the relevant shares, it controls the issuing company. An investing company controls an issuing company if it alone, or together with one or more other persons connected with it, can exercise direct or indirect control over the company's affairs. This may include possession of, or entitlement to acquire, more than 50% of

• the company's issued ordinary share capital
• the voting power in the company
• the company's income, if it were all distributed
• the assets of the company on a winding up. For this purpose we ignore
• all rights attached to certain types of preference shares (' relevant preference shares') of the issuing company
• rights as a loan creditor of the issuing company.

Relevant preference shares

'Relevant preference shares' are shares that have qualities more akin to debt than to equity. More precisely, they are shares which

• do not carry voting rights
• are issued wholly for new consideration
• do not carry any right to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities
• carry no rights to dividends for a period or periods, or yield only dividends which
  • are of a fixed amount, or at a fixed rate (including dividends where the amount or rate may be changed to another fixed amount or fixed rate under the terms of issue of the shares), or which are of a percentage rate of the nominal value of the shares where the rate fluctuates in accordance with one of certain pre-determined factors, and
  • do not depend on the results of the company's business or the value of the company's assets (except where they reduce if the results of the business improve or the value of the assets increases, or increase if the results of the business deteriorate or the value of the assets diminishes), and, together with any redemption sum, represent no more than a reasonable commercial return.

The 'non-financial activities' requirement

If the investing company is not a member of a group, it must exist (disregarding any incidental purposes) wholly for the purpose of carrying on one or more non-financial trades. A 'non-financial trade' is one which, in addition to being conducted on a commercial basis and with a view to making profits, does not consist wholly, or to a substantial extent, of certain financial activities (described below). Holding and managing property used by the company, and holding shares to which investment relief is attributable, if this is not a substantial part of the company's business, are disregarded.

If the company is a member of a group, that group must be a non-financial trading group. A group is a 'non-financial trading group' unless the business of the group taken together consists wholly, or to a substantial extent, of trades other than non-financial trades or of businesses that are not trades. The company itself must either be the parent company of the group, or else exist (disregarding any incidental purposes) wholly for carrying on one or more non-financial trades, or businesses other than trades.

In considering whether the requirement is met, we disregard

• holding shares in or securities of, or making loans to, another company in the group
• holding and managing property used by a company in the group for non-financial trade purposes
• holding shares to which investment relief is attributable, as long as this is not a substantial part of the company's business.

Financial activities, for the purpose of this requirement, include

• banking, or money-lending, carried on by a bank, building society or other person
• debt-factoring, finance-leasing or hire-purchase financing
• insurance
• dealing in shares, securities, currency, debts or other assets of a financial nature
• dealing in commodity or financial futures or options.

Is there any size restriction on the investing company?

No. The company may be of any size, and may be larger, smaller, or a similar size to the issuing company.

Must the investing company also be an unquoted company?

No. The investing company may be quoted or unquoted.

Is investment relief available if a company makes its investment through a limited partnership?

No. The CVS is limited to direct investment by companies that meet the investing company requirements.

If a company makes corporate venturing investment(s) would it be considered to have ceased to be a trading company for the purpose of business asset taper?

The holding of investments will not have any bearing on a company's status as a trading company for taper relief purposes unless, together with other non-trading purposes, it is capable of having a substantial effect on the extent of the company's activities.

What does 'a substantial part' mean?

Whether activities of any kind amount to a substantial part of a company's trade, or of the business of a group, is a question that can be decided in any particular case only by reference to the relevant facts and circumstances. Generally, we consider that activities are 'a substantial part' where they amount to more than 20% of the trade or business.

Can a nominee hold shares?

Yes. Shares subscribed for, issued to, held by or disposed of, by a nominee will be treated as subscribed for, issued to, held by or disposed of by the person the nominee is acting for.

Can a director, or other employee, of the investing company resign from that company and take a stake in the issuing company without the two companies being considered connected?

Yes, provided the director, or employee, disposes of any current interest in the investing company (and any company connected with it) before the issue of shares by the issuing company, and has no right to acquire any such interest in the future.

Will an investing company, which is a party to a shareholders' agreement, be treated as controlling the issuing company?

Only if the terms of the agreement give it control over the issuing company.

Will a company be able to claim consortium relief on a company it has invested in under the CVS?

The rules of the CVS, limiting the proportion of an issuing company that may be owned by corporate investors, will permit consortium relief to be claimed in some circumstances.