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 finding an external buyer. 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 time in prison!
Here 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 (assuming that one is in force) any shareholders’ agreement. Consider whether there are 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?
• Do the articles of association need to be altered to allow any buyback to take place?
• Is there a shareholders agreement that needs to be amended?
• Have the shares being bought back been fully paid?
• How will the company fund the buy back of the shares?
• Does the company have the necessary cash available or must it borrow? Generally speaking the transaction will be void if any part of the payment is deferred after completion or paid in instalments, leading to various complications, Which can include criminal liability.
The Buyback Procedure
• An agreement or memorandum of terms should be drafted to document the terms under which the shares will be bought back.
• The buyback must be approved by the shareholders in a 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.
After The Buyback
• Although an ordinary resolution authorising the buyback does not need to be filed (a special resolution would need to be filed), the registration forms must be filed at Companies House
• The resolution must be kept with the company’s records
• Stamp duty will often need to be paid on the buyback
• A copy of the agreement or memorandum of terms should be kept at the company’s registered office, available for inspection for a period of 10 years