Share buybacks can be beneficial for both parties. The seller is able to get rid of shares that they no longer want or need to free up capital, without having to search for a buyer.
And the company is able to strengthen its share price and shareholder value.
In this article, Karen Edwards, head of our Corporate and Commercial Team, looks at the ins and outs of share buybacks and outlines how it all works.
Can I sell my shares back to the company?
Depending on your circumstances, the company’s constitution (such as the articles of association and any shareholders agreement) and the financial position of the company, it may be possible to sell your shares back to the company.
Selling the shares can be a good option if you want to retire, have had a dispute with other shareholders or simply wish to exit the business.
Related: How to deal with shareholder disputes - An expert's guide
How do I sell my shares in a limited company?
Although you may be required to first offer your shares to the existing shareholders of the company, you may be able to find a third-party buyer if allowed under the company’s constitution.
However, it might not be easy to find someone who is acceptable to the company and the other shareholders.
If the company operates an employees' share scheme which requires employees to give up their shares when they leave, the company could purchase them back. In this situation, the company might hold the shares in a treasury until a new employee is found to take them over.
Related: What is a shareholders agreement and what should it include?
Why do companies buy back shares?
A company will often undertake a share buyback for the following reasons:
- Return of surplus cash to shareholders
- Increase earnings per share
- Increase net assets per share
- Enhance share liquidity
- Increase gearing
- Provide an exit route for shareholders
What are the rules for buyback of shares?
A limited company undertaking a share buyback must comply with Part 18 of the Companies Act 2006 (CA 2006) (section 658). A buyback that is not carried out in accordance with these rules is unlawful and the transaction will be considered null and void.
In such a case, and if the buyback fails, the repurchased shares would be treated as still being in issue and held by the original shareholder(s).
Furthermore, if the company directors don’t comply with Part 18, an offence is committed by the company and every officer (for example, a director) goes into default. An officer in default is liable to a prison term of up to two years, an unlimited fine or both.
Related: Can a director be personally liable for company debts?
Under what circumstances are companies permitted to buy back their shares?
Generally, if the company's constitution does not restrict or prohibit it from doing so, a company is allowed to purchase its own shares.
However, be aware of the following:
- Under the Companies Act 2006, a company may give financial assistance for the acquisition of its own shares so if there is any restriction on the giving of financial assistance in the company's constitution, this should be removed;
- If the company has more than one class of shares, consider whether the buyback will result in the variation of the rights attaching to those classes of shares (in which case class consent to vary will be required);
- Consider if there is any banking facility which might restrict the company's ability to undertake a buyback; and
- There must be at least one non-redeemable share in issue after the buyback.
What is the procedure for a buyback of shares?
Typically, the directors decide whether the company should carry out the purchase of shares. Before they make the decision, they must check the shares have been fully paid up (i.e., the company has been paid the face value, plus any premium, set for the shares when they were issued).
There must be a written contract recording the purchase of shares by the company or, it can be a contract under which the company may become entitled or obliged to purchase the shares in the future (but, only if certain conditions are met).
The contract for this type of off-market share buyback must be approved by the shareholders either before the contract is entered into or the contract must state that no shares will be purchased until its terms have been approved by resolution of the shareholders.
For this, approval by members representing at least 50% of the total voting rights is required.
Related: What makes a strong business contract? Our advice
Who must approve a share buyback?
If a company is buying back shares using distributable profits, it will not generally need approval from its creditors.
However, creditors may have direct or indirect influence through agreements a company has with them. If shares are being purchased out of the company’s capital, special rules also apply to protect creditors and the procedure is slightly more complicated than a buyback funded by distributable reserves.
How do you calculate share price for a buyback?
Generally speaking, the price will usually be determined by the directors.
There may however be provisions in the company's constitution that govern how shares should be valued in a buyback.
Financing the buyback
A private company may purchase its own shares:
- Out of profits available for distribution; or
- Out of the proceeds of a fresh issue of shares made for the purpose of such financing
- The new issue must be made to fund the buyback
- It is recommended that the buyback is made at the latest within a few months following the issue of the new shares; or
- By making a payment out of capital, subject to any restriction or prohibition in the company's constitution; and
- With cash up to an amount in a financial year not exceeding the lower of £15,000 or the value of 5% of its share capital.
The general rule is that shares must be paid for in full at the time of completion of the buyback
However, for buybacks involving an employee share scheme, the shareholder and the company can agree for the shares to be in instalments.
To make it easier for companies to finance buybacks for the purposes of employees' share schemes, the Buyback Regulations 2013 introduced a simplified process for buying back out of capital involving a special resolution.
This was supported by a solvency statement (section 720A), which made the rules for employee share buybacks similar to the rules for reducing capital via the solvency statement procedure.
Who needs to be notified of a share buyback?
The company needs to notify Companies House within 28 days of any purchase of its own shares. If the shares being bought back are cancelled, the company must notify Companies House of that too.
Further points to note concerning share buyback
- The shares bought back are cancelled and the amount of the company's issued share capital is diminished by the nominal value of the cancelled shares (or the shares can be held in treasury);
- The register of members must be updated;
- Share certificates relating to the shares bought back will need to be cancelled;
- Stamp duty must be paid by the company at the rate of 0.5% of the purchase price on purchases over £1,000;
- The company must update its accounts to reflect the change to the company's issued share capital or any relevant reserves; and
- A copy of the buyback contract must be kept at the company's registered office for a period of 10 years following the buyback.
A Specialist Corporate and Commercial solicitor's view
Tax is a complex area, so you should always take advice from an expert tax adviser, usually an accountant specialising in tax matters.
Karen Edwards, Head of our Corporate & Commercial Team, says: “Although transferring shares is a relatively simple process, complex issues, such as dealing with existing debts and loans, can make things more difficult.
In addition, buybacks usually take place for considerable amounts of money, often with tight deadlines.
For these reasons, it’s always wise to take advice from an experienced lawyer who can guide you through the transaction and ensure nothing vital is missed.”
Specialist Share Buyback Solicitors
If you have any questions following this article, or would like some tailored advice on share buybacks, whether your buying or selling, please don’t hesitate to get in touch with our bright team.
The Corporate & Commercial Team at Frettens is one of the largest and best-resourced departments in the area and has plenty of experience in dealing with share buybacks.
To get in touch, you can call us on 01202 499255, or fill out the form at the top of this page, for a free initial consultation.
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