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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.
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:
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:
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.
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 firstname.lastname@example.org.
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.