Share Buybacks by Private Limited Companies

A Share Buyback or a company purchase of own shares is where a company acquires shares in itself from an existing shareholder.? The procedure in the Companies Act 2006 must be adhered to.? A buyback by a private limited company is an off-market purchase.

Why undertake a share buyback?

• To return excess cash to shareholders
• To buy out a shareholder seeking an exit or consolidate ownership
• To increase share value (reducing the number of shares outstanding can increase earnings per share and potentially enhance the perceived value of the remaining shares
• To appear financially healthy or more attractive
• To optimise capital structure
• Tax efficiency (as opposed to dividends)

Requirements:

1. Authority

The company must have authority to undertake a share buyback – the Articles of Association must be checked to ensure there’s no prohibition or restriction on a? buyback.? If the Articles don’t allow the proposed buyback, it will require a special resolution to authorise the buyback (or to amend the Articles to allow a buyback).

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1. Funding

The company can use distributable profits, proceeds from new share issues, or capital (with special resolution and solvency statement). The most common (and simplest) method is a purchase funded by distributable reserves.? The shares to be purchased must also be fully paid up.

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1. Procedure

(a)? Prepare a contract to document the share buyback and the main terms.

• Hold a board meeting of the company to consider the buyback, confirm there are adequate distributable reserves, approve the buyback contract and submit it to the shareholders for approval.
• Approve the buyback contract by the shareholders of the company by special resolution. Note that the shareholder whose shares are being purchased is not entitled to vote on this resolution.
• Complete the buyback contract and ensure the consideration is paid.
• Submit buyback contract, Form SH03, and if applicable, Form SH06. Note that stamp duty is payable on a share buyback and form SH03 must be stamped before filing.

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1. Other Considerations

• Ensure there’s a fair share valuation.
• Consider the tax effects for both the company and the shareholders (ensure you have taken tax advice and relevant clearances have been obtained).
• Assess the impact on the share capital, the shareholders, ownership and voting control following a proposed buyback.
• The company must pay for the shares in full and the buyback agreement cannot provide for deferred consideration. If the company does not have sufficient distributable reserves, the company may need to consider buying back shares in instalments over a period of time.

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For help and advice on a company buyback of shares, please speak to our Corporate team at [email protected]