SHARE BUYBACKS Quick Guide
Share Buybacks A private company can return value to its shareholders by buying back some of its shares. This is known as a 'share buyback' or a 'company purchase of own shares'.
Why buyback shares? The two main reasons are to:
return surplus cash to shareholders, for example as a result of unexpected profitability or more cash than anticipated being available if potential expenditure has not occurred for some reason; and
provide an exit route for shareholders, for example where a shareholding employee ceases to be employed.
Types of buyback The statutory procedure to be followed depends on whether the proposed buyback is an 'off-market' purchase or a 'market' purchase. A private limited company carrying out a share buyback will always make an off-market purchase. Market purchases are unlikely to be of relevance to private companies. Any buyback must be undertaking in accordance with the Companies Act 2006 ("CA 2006") must be complied with. In the event of contravention, the transaction will be void and an offence will be committed by the company and every officer in default.
Preliminary considerations A company looking to undertake a buyback will need to consider the following:
do the company's articles of association permit the buyback? Under CA 2006, a company will be deemed to have authority to carry out a buyback so long as the articles do not explicitly prohibit the buyback;
whether there are any private agreements (e.g. shareholder agreements) which may restrict the company's ability to purchase its own shares or require certain permissions to be sought;
whether there are any pre-emption rights which restrict the transfer of shares e.g. there may be a requirement for shares to be offered to existing shareholders before they can be transferred to the company;
whether there is any prohibition on giving financial assistance which could prevent the company from buying its own shares. 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;
whether 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); and
whether there is any banking facility which might restrict the company's ability to undertake a buyback.
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Share capital requirements There must be at least one non-redeemable share still in issue after the buyback completes. Only fullypaid shares can be bought back.
Financing a Buyback A private limited company may finance an off-market purchase:
out of profits available for distribution;
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 and we suggest that the buyback is made at the latest within a few months following the issue of the new shares);
out of capital (as such a payment is potentially to the prejudice of the company's creditors, the company must follow a prescribed procedure when buying back shares out of capital which involves the directors making a statement specifying the amount of the capital payment for the shares and confirming that the company can pay its debts, a report by the company's auditors and publication of a notice in the Edinburgh Gazette and a national newspaper); or
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.
Shares bought back by a company (other than under an employees' share scheme) must be paid for at the time they are purchased which means that deferring payment or payment by instalments is not possible.
Buyback contract In order to make a share buyback, a company must enter into a contract with the shareholder(s) whose shares are to be purchased. It is usually a simple agreement providing for the company to purchase the shares or it can be a contract under which the company may become entitled or obliged to purchase the shares in the future subject to certain conditions being met. It need not be a standalone contract and can be incorporated into the company's articles as standing authority to buyback. The contract for an 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.
Effect of 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;
Companies House filings must be made within 28 days of the buyback;
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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
Next Steps We hope this assists you in understanding the issues surrounding Share Buybacks. We are of course happy to discuss any aspect of this note further.
Iain Young Partner E: iain.young@morton-fraser.com T: 0131 247 3194
Austin Flynn Partner E: austin.flynn@morton-fraser.com T: 0131 247 1260
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