Keurig and Dr. Pepper’s merger


(Simon James Northcott) #1

How are others dealing with the US $103.75 per Dr Pepper share special dividend in a life interest trust? Capital or income or a bit of both?

Simon Northcott


(Malcolm Smith) #2

$29.50 taxable as a dividend ref. Computershare USA payment to me.

15% USA tax deducted at source provided a valid W-8BEN form held by your broker

Return of capital $103.75 - $29.50 = $74.25/share and CGT liable.

Malcolm Smith


(Paul Saunders) #3

According to the prospectus, the special dividend was payable to Dr Pepper shareholders before the merger was effective. On the merger becoming effective, Keurig shareholders received new shares in the merged entity, with Dr Pepper shareholders continuing to hold the, now renamed, Dr Pepper stock.

Lewin on Trusts, 19th Edition (@ 25-054) states that if the proper law of a trust is English Law, the English court will classify a distribution as capital or income according to English principles.

Looking back at cases such as Bouch v.Sproule (1887) and Hill v. Permanent Trustee Co. of New South Wales Ltd. (1930), the classification of receipts from companies follows their classification as distributions under company law. As the special dividend is referred to throughout the prospectus as a “dividend” in principle it is received by a trustee as income (for trust law purposes). However, in Re Duff’s Settlements (1951) the Court of Appeal held that where a distribution was made from a company’s share premium account, it was considered to be similar to an authorised reduction of capital.

The prospectus for the Dr Pepper/Keurig merger identifies that the special dividend exceeds the company’s E&P (an apparently undefined term within the Prospectus). If the E&P is, in effect, the company’s undistributed balance of its profit and loss account, the remainder of the dividend would appear to be made up from the company’s reserves, represented in the balance sheet as stockholders’ funds, which the Duff decision might characterise as equivalent to the share premium account. If so, then it might be appropriate to attribute that part of the special dividend to capital.

I note the prospectus states that, for US tax purposes, the amount received which can be attributed to E&P is to be treated as income, and the balance will be subject to capital taxes. However, the views of the IRS, like those of HMRC, relate only to the taxation of receipts and not to the allocation of such receipts between capital and income for the purposes of trust law.

The prospectus (http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=12281672&type=PDF&symbol=KDP&companyName=Keurig+Dr+Pepper+Inc.&formType=DEFM14A&dateFiled=2018-05-29) is some 500 pages of pure excitement, so I apologise if I happen to have blinked and missed a relevant line.

I wonder if there are any barristers specialising in such matters who might be willing to express a view as to the beneficial entitlement to the special dividend between capital and income.

Paul Saunders


(alexander.learmonth) #4

Subject to the words of the trust deed or will, Theobald on Wills says that dividends should be treated as income, unless s.2 of the Trusts (Capital and Income) Act 2013 applies (ie a new trust, and a corporation tax-exempt distribution). I don’t see how the 2013 Act can apply to an American company, but I am not a corporate tax lawyer!
Alexander Learmonth
New Square Chambers