Investors selling Diligent shares to avoid being taxed, analysts say

New Zealand-based investors are selling out of Diligent Corp [NZX: DIL] before the company is acquired by venture capital firm Insight Venture Partners for fear they'll have to pay tax, analysts say.

Under the terms of the agreement, Diligent shareholders will receive $7.39 (US$4.90) in cash per share. The shares will go into a trading halt on Monday after the market closes before a special meeting of stockholders on Wednesday morning. If the sale goes ahead, Diligent will be delisted and money will be paid to shareholders.

In a statement filed to the stock exchange on March 7, Diligent said New Zealand holders of the stock may be liable for tax if the merger proceeds because Diligent is a foreign company for the purposes of the foreign investment fund (FIF) tax rules. A tax liability will arise if a New Zealand investor applies the FIF rules to their foreign company investments. However, that can be avoided if a New Zealand shareholder sells before the merger is approved.

The NZ Shareholders Association drew attention to the potential tax liability for New Zealand shareholders of the NZX-listed, New York-based company.

The stock has seen a sharp lift in volume since it announced the intended takeover in February, with 6.42 million shares sold in yesterday's session, beating the previous record of 880,357 shares traded in a single day.

JBWere's New Zealand equity manager Rickey Ward said questions about whether the merger would be a taxable event have spurred selling.

"There was a paragraph in the booklet that indicated it could be a taxable event because it would be deemed to be a merger, which creates a problem. We recommend individuals seek personal tax advice because we're not tax experts but it came about through a comment in their booklet," Mr Ward said.

"If it ends up being a taxable event, you get taxed on the price over the last financial year compared to the takeover, which is significantly higher – so you could be liable for a large bill for a company which doesn't pay any income; it doesn't pay a dividend," he said. "People have become a bit wary of that and have made an investment decision based on the gap in the price and the potential taxation issue.

"I think that's why you've seen the volume steadily increase from the sell side, predominantly going into US buyers or global hedge fund or absolute funds just buying it for a short-dated positive return."

(BusinessDesk)