The rules about companies purchasing their own shares are reasonably complicated in order to protect the company's creditors, and as such legal assistance should always be sought before attempting the process.
There is no requirement under the Companies Act 2006 (the “CA 2006”) for a company’s articles to include a specific authority for the company to purchase its own shares. Nevertheless, the company's articles must be checked to ensure that they do not restrict or prohibit the company from purchasing its own shares. Where a company's articles expressly restrict or prohibit buybacks, the articles may be amended by special resolution to remove the prohibition or restriction.
A company may carry out a small buyback of capital by taking advantage of the so called “de minimis” exemption, where there is specific authority in the company’s articles. Please see section 3.4 below for details.
The articles and any other shareholder agreement should be checked to ensure that there are no pre-emption provisions or similar restrictions which may require shares to be offered to the existing members before they can be transferred to any other party, including the company. If triggered, these provisions would need to be complied with, waived or amended before the company undertakes a buyback.
A buyback can be funded by any of the following means:
How the buyback is financed will determine the procedure to be followed to carry out the buyback.
A buyback contract is an agreement between the company and one or more shareholders whose shares are to be purchased. It can be a simple agreement providing for the company to purchase the relevant shares or to become entitled or obliged to purchase the shares at a later date.
The buyback contract must be approved by a resolution of the shareholders. An ordinary resolution will normally suffice, unless the articles require a higher majority, and the company may implement the share buyback at any time after the shareholder resolution approving the buyback contract is passed.
Often, one of the simplest means of funding a buyback is through distributable profits, i.e. profits of a company that could otherwise be paid out as a dividend. When considering whether to make a distribution, the directors should consider whether the company will be solvent following the distribution. To do this, they should consider any change to the company's financial position since the date to which the relevant accounts were drawn up, as well as looking forward to the future cash requirements of the business (which will involve taking into account the effect of actual and contingent liabilities as well as any other transactions which may alter the company's distributable reserves).
This is an accounting matter and advice will need to be obtained from the company's accountants before proceeding.
Only private limited companies (as opposed to public companies) can purchase their own shares out of capital, subject to any restriction or prohibition in the company’s articles.
Unless the buyback falls within the de minimis cash exemption (see section 3.4), any payment out of capital must strictly follow a prescribed procedure as follows:
A company can issue new shares to raise the necessary monies for the purpose of funding the buyback. There is no set time period between issuing the shares and effecting the buyback, but prudently, the buyback should take place within a few months following the issue of new shares in order to show a clear link between the share issue and the buyback.
The company must ensure that the new shareholders are entered in the register of members before using the proceeds of the share issue to complete the buyback.
A company can carry out a small buyback of shares out of capital without having to undertake the full process set out in section 3.2 by taking advantage of the “de minimis” exemption, provided that it is authorised to do so in its articles. If not, the Company will need to adopt a new article which expressly permits a payment out of capital via this route.
Under the “de minimis” exemption, a private limited company may purchase its own shares out of capital up to an aggregate purchase price in any financial year, of the lower of:
If the company carries out the buyback out of capital by taking advantage of the de minimis cash exemption, please note that the directors of the company will not need to provide a director’s statement or an auditor’s report.
Special rules apply if a company is proposing to carry out a buyback for the purpose of, or pursuant to, an employees’ share scheme. The Buyback Regulations 2013 permit:
Any shares bought back by a company pursuant to the steps outlined above:
The register of members, register of transfers; and the company’s statutory register must be updated to reflect the cancellation of shares following the buyback or any shares held in treasury by the company.
Copyright © 2013 - Oury Clark.