The family home will often be the most important matrimonial asset during any divorce case, and a...
When a shareholder decides to leave a company, a commonly used method is for the company to buy back the shares using its retained profits.
A buyback of shares can provide an efficient exit route for a shareholder. It can also be offered as an alternative to transferring shares to another shareholder or another person. To do so might require them to finance the acquisition and the balance of shareholdings might be affected. In some circumstances a buyback of shares can be a useful method of returning surplus cash to shareholders.
First and foremost it is vital that the buyback complies with the requirements of the Companies Act 2006 as failure to do so will render the transaction void. The consequence is that both the company and every director who acted in default would have committed an offence punishable by fine and the directors could face up to two years in prison!
Set out below are some key considerations a private limited company should consider to make sure the process is followed correctly:
Before The Shares Are Bought Back
Check the company’s articles of association and any shareholders’ agreement (assuming that one is in force). Are there restrictions that might prevent the company from buying back the shares, or are there obligations for the shares to be offered to the remaining shareholders before the company or any other person can acquire them?
Should the articles of association or shareholders agreement be altered to allow any buyback to take place?
Have the shares being bought back been fully paid? Any outstanding sums should be paid to the company before any buyback proceeds.
How will the company fund the purchase of the shares? A company will commonly fund a buyback of shares through its distributable profits as shown in its accounts. A buyback may also be funded out of capital or by issuing new shares (these methods are outside the scope of this article). If the purchase price does not exceed the lesser of £15,000 or 5% of the share capital, the shares may also be bought back using cash without reference to the distributable profits.
Does the company have the necessary cash available or must it borrow? All purchase funds need to be available at the time of the buyback unless a ‘multiple completion’ method is used. If any part of the payment is deferred after completion or paid in instalments, the transaction will be void, leading to various complications, not least including criminal liability.
The Buyback Procedure
An agreement should be drafted to document the terms in which the shares will be bought. Alternatively if no agreement is drafted, a memorandum of the terms may be used.
The buyback must be approved by the shareholders in general meeting or by written resolution circulated to the shareholders.
Copies of the proposed agreement must be circulated to all shareholders in advance of the general meeting or sent out at the same time as the written resolution.
Normally an ordinary resolution must be passed, meaning that over 50% of the non-selling shareholders need to vote in favour of the buyback.
If the resolution is passed, the buyback may take place and payment must be made.
After The Buyback
Certain administrative steps with time limits must be undertaken in order for the buyback to be valid, including:
• A copy of the resolution authorising the buyback must be filed at Companies House together with certain prescribed forms.
• Stamp duty will need to be paid on the purchase price.
• The register of members and accounts must be updated.
• A copy of the agreement or memorandum of terms should be kept at the company’s registered office, available for inspection after the ordinary resolution is passed.
Further Considerations
As with any disposal of or dealing with shares, thought should be given to the tax implications of the transaction and whether it will qualify as for capital treatment. Advice should be taken from accountants on such matters, with any necessary tax clearances being sought and obtained.
Although buybacks of shares should be relatively straightforward processes, there are a number of traps for the unwary. We have encountered a number of instances where administrative steps have been carried out incorrectly and some instances where buybacks that were carried out some time previously are void. Please refer to the following case studies for further details.