The importance of getting Share Buybacks right
Following on from our article which considered whether a share buyback is right for you, we are now examining the fundamental steps that must be followed in order to correctly carry out a share buyback (& the consequences of failing to do so).
For the purpose of this article, we will be focusing on a private company limited by shares financing the buyback out of distributable profits.
As a first port of call, before a company is considering a share buyback, it must check its articles of association (Articles) to ensure that they do not restrict or prohibit the buyback of shares. If there are restrictions or prohibitions, it may be possible to amend the Articles (and disapply such restriction/ prohibition) by way of a special resolution of the shareholders.
Once it is established that there are no restrictions/ prohibitions in the Articles, the company must then follow the steps set out Part 18 of the Companies Act 2006, in particular:
- Written Share Buyback Agreement: there must be a written agreement setting out the terms (or, at least, the basic terms) of the buyback of shares (Agreement). The Agreement will need to include (i) the name of the selling shareholder(s), (ii) the number and class of shares being sold and (iii) the price being paid for the shares subject to the buyback.
- Shareholder approval is required: unless the Articles state otherwise, the shareholders are required to approve the Agreement (after having been provided a copy of the Agreement) by way of ordinary resolution. For the purpose of a share buyback, the selling shareholder cannot vote on the resolution.
- Shares must be paid for on completion: when a company agrees to buy its own shares from a selling shareholder, the shares must be paid for in full, in cash, on completion – thus payment cannot be deferred or paid in instalments. If the company does not have sufficient distributable profits to buy all shares upon entry into the Agreement, the Agreement can be drafted in such a way that provides for separate buybacks on different dates. However, it is important to note that, where multiple tranches are proposed, the selling shareholder will remain the holder of the shares until the future date(s) and the company must have sufficient distributable profits on such date to effect the buyback.
- Post-completion, the shares are to be cancelled or held in treasury: Where the shares are cancelled, the cancellation takes place immediately upon the return of the shares to the company. Upon cancellation, the amount of the company’s issued share capital is reduced by an amount equal to the nominal value of the shares bought back. Where the shares are held in treasury, the provisions of the Companies Act 2006 apply.
- If applicable, stamp duty must be paid: Unless the purchase price is £1,000 or less (or another exemption applies), the company will be liable to pay stamp duty (currently at the rate of 0.5%) on the price paid for the shares.
It is also recommend that the company seeks advance clearance from HMRC to see if HMRC will consider the proposed buyback of shares to be a capital transaction, rather than as a distribution for tax purposes.
- Articles don’t permit the share buyback: the share buyback will be void.
- Insufficient distributable profits: the share buyback will be void and the distribution will amount to an unlawful distribution.
- No written agreement: the share buyback will be void unless the buyback is for the purpose, or pursuant to, an employee share scheme.
- Shareholder approval not obtained: provided that all shareholders consent to the share buyback, there may be scope to rely on the Duomatic principle to validate non-compliance. However, if unanimous consent is not obtainable, the share buyback will be void.
- Shares not paid for in full, in cash, on completion: in the event that the company has decided to (i) leave the payment due to selling shareholder as outstanding on a loan account; (ii) make the payment after completion; or (iii) make the payment in instalments, the share buyback will be void. However, there may be circumstances (such as payment in advance/ transfer of a non-cash asset/ set-off against a liability) which may not be considered to void the share buyback – but these circumstances have not been fully considered in a court of law so it is best practice to pay in full, in cash, on completion.
- Failure to file forms at Companies House in time: In the event that the relevant Companies House forms are not submitted to Companies House within the prescribed time, every director in default (and, where the shares are being cancelled, the company) commits an offence.
- Failure to pay stamp duty in time: HMRC may charge the company a penalty and interest for any period after the payment deadline.
In the event the company does not have sufficient distributable profits, it may still be able to explore a buyback of shares out of capital (either using the De Minimis exception or otherwise).
Should you wish to discuss any corporate matters, including implementing a share buyback, please do not hesitate to contact our Corporate & Commercial Department.
Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.
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