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Company Share Buybacks

A company share buyback is when the company itself purchases the shares of a shareholder, as opposed to a third party purchaser, and the shares are cancelled.

In this article we will be concentrating on share buybacks carried out by private limited companies only.

Shareholder exit - why choose a share buy back?

One of the main reasons for proceeding with a company share buyback is to facilitate a shareholder exit from a company. 

Some of the reasons for choosing this type of transaction, as opposed to a normal share sale to a third party purchaser, include the following:

  • a) the company’s articles of association or shareholders’ agreement prevent an exiting shareholder from selling their shares to a third party purchaser (at least in the first instance) and require the shares to be bought back by the company in the event of the continuing shareholder(s) not wanting to purchase the shares to avoid unknown third parties joining the company;
  • b) the continuing shareholders or any third party purchaser may not be able to afford or fund the share purchase;
  • c) where the purchaser is an existing shareholder, the company does not wish to allow a shareholder to increase their shareholding in the company; or
  • d) purchasing the shares of an employee under an employee incentive scheme (for example an Enterprise Management Incentive (EMI) scheme.

Share buyback legal requirements and considerations

Before proceeding with a share buyback, it is important the requirements under Part 18 of the Companies Act 2006 (CA 2006) are complied with, as a failure to do so will result in the transaction being void, meaning it will have no legal effect, and an offence being committed by the company and every officer in default. An officer in default is liable to a prison term of up to two years or an unlimited fine, or both.

The most common legal requirements often overlooked in these types of transactions are as follows:

  1. a limited company may only buy back shares that are fully paid;
  2. the purchase price payable by the company for the shares must be made in full and not on a deferred basis (ie. by instalment payments following completion);
  3. the share buyback must comply with any requirements set out in the company’s articles of association, so any restrictions included in the articles of association regarding share buybacks must be addressed before the transaction takes place;
  4. appropriate shareholder approval has not been obtained prior to the transaction; and
  5. the transaction must be funded out of sufficient distributable reserves or capital (provided the articles of association do not restrict or prohibit such acquisitions out of capital). Therefore if there is insufficient distributable profits or capital, the company will be unable to proceed with the share buyback.

In addition to the above, it is also important to note that a share buyback will require the company to pay any stamp duty on the share being bought back, as opposed to a third party purchaser (unless another arrangement is agreed between the company and exiting shareholder). This is tax charged at 0.5% of a purchase price in excess of £1,000 (rounded up to the nearest £5) and is payable to HMRC.

Glanvilles LLP Legal Assistance

It is important legal and accountancy advice is obtained before proceeding with a share buyback to ensure the proposed transaction is not restricted or prohibited under the company’s articles of association; is compliant with the share buyback requirements under the CA 2006; and the necessary legal documents and approvals are prepared evidencing the transaction.

If you are considering proceeding with this type of transaction and require any further information or advice on the above, please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on scott.richardson@glanvilles.co.uk.

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.