For business owners that want to sell their shares in a private limited company (for example, because they want to retire, have had a dispute with other shareholders or wish to exit the business) selling those shares back to the company may be a good option. This is dependent on the terms of the company’s articles of association and a shareholders agreement if there is one.
Although you may be required to first offer your shares to the existing shareholders of the company to purchase your shares from you, however this relies upon them having the funds available to do so (or if there is a dispute, you may simply not want to deal with each other). Another option is to find a third party buyer. This must be allowed under the company’s constitutional documents (articles of association, shareholders agreement). It may 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 (for example, if they have been dismissed or have resigned to join a competitor), the company may purchase its own shares. In these circumstances, the company may buy the leaver's shares back and hold them in treasury until a new employee is found to take them over.
Why might the company want to buy its own shares?
The reasons for a company undertaking a share buyback are usually one or more of the following:
- 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
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 Part 18 is unlawful and the transaction void.
In such circumstances, the buyback may be unwound in which case the repurchased shares would be treated as still being in issue and held by the original shareholder(s).
A further, very important, consequence for directors of the company to note is where there is non-compliance with Part 18, an offence is 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.
Is there no restriction on a company being allowed to purchase its own shares?
Generally, if the company's articles of association or any shareholders agreement do not restrict or prohibit it from doing so, a company is allowed to purchase its own shares. However, be aware of the following:
- under CA 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);
- is there 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.
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 (if certain conditions are met).
The contract for this type 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 (approval by members representing at least 50% of the total voting rights is required).
Do you need to seek approval from creditors?
If you are purchasing your own shares using distributable profits, you do not generally need approval from your creditors. However, creditors may have direct or indirect influence through your agreements with them. If you are purchasing shares out of capital, special rules apply to protect creditors.
How is the price determined?
The price is determined by the directors who may find they have to comply with terms in the company's articles of association or a shareholders agreement governing valuation of shares on a buyback.
Financing the buyback
A private company may purchase 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. Payments out of capital are subject to any restriction or prohibition in the company's articles; 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, if the buyback is for the purposes of an employee share scheme, the shareholder and the company can agree that the purchase price will be paid in installments. 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 supported by a solvency statement (section 720A), thereby bringing the requirements for an employee's share scheme-related buyback out of capital broadly in line with a reduction of capital by means of the solvency statement procedure.
Does the company need to notify anyone if the company purchases own shares?
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, you must notify Companies House of that too.
Further points to note concerning the effect of the 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.
Tax is a complex area, you should always take advice from an expert tax adviser, usually an accountant specialising in tax matters.
He says "Although transferring shares is a relatively simple process, the background often involves many complex issues, for example, the assumption or redemption of existing debts or loans, vendor warranties and post-completion accounts. Then there are the other practical adjustments to think about alongside the legal implications - for example nurturing existing business relationships and the impact on staff. These transactions usually take place for considerable amounts of money, often with tight deadlines. It is wise to take advice from a specialist, experienced lawyer who can guide you through the transaction and ensure nothing vital is missed.”
Our Corporate and Commercial Teams are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.
If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Wayne or a member of the team will be happy to chat about your situation and your particular requirements.