Share Buyback – For Private Companies

What is a share buyback?

A share buyback is a purchase by a company of its own shares from one or more of its shareholders.

A company must follow the strict requirements of the Companies Act 2006 when completing a share buyback. Failure to do so may result in the buyback being void and a criminal offence being committed by the directors and the company. 

Key requirements for a share buyback

Some of the main requirements for a share buyback are that:

1. the shares are purchased either off market or on market, which will depend whether the shares are available for purchase on a recognised investment exchange;
2. approval of the shareholders (excluding the shareholder(s) whose shares will be purchased by the company) must be obtained;
3. there must be a buyback contract between the company and the selling shareholder, a copy of which must be kept available for inspection by shareholders at the company’s registered office for a period of at least ten years from completion;
4. the shares being purchased are fully paid;
5. the consideration for the shares must be paid in cash and in full at the time of the purchase, there can be no deferred consideration;
6. the buyback must be financed out of either (i) distributable profits, (ii) the proceeds of a fresh issue of shares or, (iii) in the case of a private limited company only, out of capital; and
7. following the purchase, the shares must be cancelled or, if financed out of distributable profits, can be held in treasury.

When might a company consider completing a share buyback? 

A company may carry out a share buyback for various reasons, including but not limited to:

• a director/shareholder is retiring or leaving the company and the other shareholders do not have sufficient funds available to purchase the sale shares, a buyback is an alternative option;
• to return surplus cash to shareholders. A company may have surplus cash because of outstanding profitability, the sale of a business or having cash in readiness of a potential acquisition or planned expansion that has fallen through;
• to increase earnings per share. A buyback can improve a company’s price/earnings ratio and thus increase the company’s earnings per share. When a buyback enhances earnings per share, this should also lead to an increase in share price;
• increase net assets per share;
• enhance share liquidity; and
• increase gearing (increase the company’s ratio of debt to equity).

How can a share buyback be funded?

When can a share buyback be void?

Where a company has carried out a share buyback in breach of the requirements set out in the Companies Act 2006, the buyback may be void. Furthermore, subsequent corporate actions may be declared invalid and potential future purchasers/investors could also be discouraged. 

In addition to failing to comply with the Companies Act 2006, the Court has held that a share buyback will also be void where the:

• company's articles of association did not specifically authorise buybacks;
• company did not have sufficient distributable profits to fund the buyback;
• purchase price:
  • had been left outstanding on a loan account; 
  • was to be paid after completion; and/or
  • was paid in instalments. 

HMRC Clearance 

It is advisable for the selling shareholder to seek the advice of a tax specialist to gain HMRC clearance prior to proceeding with the buyback.

If the purchase price paid is over £1,000 then stamp duty will also be payable by the purchasing company at a rate of 0.5%. 

How we can help

If you are planning on completing a share buyback, get in touch with our specialist corporate and commercial solicitors today either by telephone on 0133 222 5225, complete our contact form, or send us an email via info@smithpartnership.co.uk. 

We also have offices across the East Midlands and Staffordshire with expert corporate and commercial solicitors, in Burton, Derby, Leicester, Stoke-On-Trent and Swadlincote.