How To Carry Out A Private Company Share Buyback

The main reasons why a company may want to pursue a share buyback are to:

• return any surplus cash to the shareholders;
• increase earnings per share; and
• provide an exit route for shareholders, for example those who wish to exit a small company or where an employee ceases to be employed.

Statutory Requirements

Limited companies are required to comply with Part 18 of the Companies Act 2006 (“CA 2006”) in respect of company share buybacks. Without compliance, the acquisition will be void and an offence would be committed by the company and their officers.

The Buyback Regulations 2013 have amended aspects of the CA 2006 including:

• permitting private companies to defer payment or pay in instalments for the shares;
• simplifying the procedure for buybacks involving payment out of capital for the purposes of an employee’s share scheme, allowing the acquisition to take place through a special resolution (at least 75% of members’ votes) and a solvency statement; and
• permitting companies to pass an ordinary resolution (at least 50% of members’ votes) to allow employee-related buybacks to be carried out in the future, through the granting of a general authority.

Preliminary Considerations

Is your company going through cash-flow problems?

• If so, a buyback could make the situation even worse. It could leave the company having to borrow more to pay for the buyback, resulting in a bigger debt that will have to be paid.

Have you considered issuing new shares to other individuals?

• Doing so may allow the company to raise cash without having to borrow further to fund the buyback.

Do the company’s articles contain any restrictions or prohibitions in relation to buybacks, and are there any pre-emption provisions?

• If there are restrictions or prohibitions in place preventing a company from carrying out a buyback, then the articles will have to be amended through a special resolution (at least 75% of members’ votes).
• If the articles contain any pre-emption rights then these would need to either be complied with, waived or amended.
• Any prohibition on the giving of financial assistance contained within the articles preventing the company from buying shares will have to be removed.
• Any private shareholder agreements will also have to be checked for similar provisions.

Financing the Buyback

There are a number of ways a buyback can be financed including:

• From distributable profits;
• Through the fresh issue of shares for the purpose of funding the buyback;
• Out of capital; or
• Out of capital through the de minimis exemption where, if specifically authorised in the articles, a company may buyback its own shares in any financial year, an amount not exceeding the lower of a) £15,000, or b) the nominal value of 5% of its fully paid share capital.

Procedure for Share Buyback using Distributable Profits or a Fresh Issue of Shares

Step 1 – Buyback contract approval required by the shareholders

• The buyback contract itself should contain all the main terms of the buyback, such as name of the selling shareholder(s), number and class of shares being sold and the price to be paid for the shares.
• Unless the articles state otherwise, the buyback contract must be approved through a resolution either:
  • Before it is entered into; or
  • After it is entered into, as long as the shares cannot be purchased until terms have been authorised in a separate resolution.
• Depending on the approval method used the buyback contract:
  • Should be circulated to the shareholders along with the written resolution; or
  • A copy of the buyback contract should be made available for inspection to all shareholders for at least 15 days before the shareholder’s general meeting at the company’s registered office.
• The selling shareholder won’t be able to vote on the written shareholder resolution or approve the buyback contract at a general meeting.
• The buyback contract can be varied, revoked or renewed even after initial approval through an ordinary resolution of the members. The original contract again must be made available to members along with any proposed variations.

A typical and easily adaptable basic share buy back template can be found in our shop. There relevant shareholder resolution and board minutes can also be downloaded here. As far as transactions go, the final buy back agreement is often quite a concise and short form document, although some deals can be more complex than others – in which case several additional bespoke and negotiable provisions will be built into the main framework agreement.

Step 2 – Payment for Shares

• Once approved, the directors will hold a second board meeting to pass a board resolution to enter into the buyback contract, however the company may be able to implement the contract at any time after it has been approved unless there is a long-stop date. It is usual to implement them as soon as possible, particularly if shares have been issued for the purposes to buyback current shares.
• Shares have to be paid for at the time they are purchased (other than for the purposes of or pursuant to an employees’ share scheme), meaning the possibility to pay in instalments isn’t available.
• Multiple completions can occur although that would require separate contracts for each completion date and, if distributable profits are the chosen financing method, enough profits will have to be available on each date.

Step 3 – Post-Buyback

• Any shares bought out of distributable profits may be cancelled or held in treasury.
• Any shares bought of the fresh issue of shares must be cancelled.
• Stamp duty must be paid by the company at the rate of 0.5% on the purchase price for purchases over £1,000.
• Accounts will need to be updated to reflect any changes to the company’s issued share capital or reserves.
• The directors will have to send the relevant forms to Companies House including forms SH03 and SH06, along with details of the shares bought back within 28 days.
• A copy of the contract must be available for 10 years at the company’s registered office once the buyback has been completed.
• The register of members will have to be updated.
• If any special resolutions have been passed to approve the buyback of shares they will also need to be filed at Companies House.

Procedure for Share Buyback out of capital

Step 1 – Any available profits must be non-existent

• A share buyback out of capital can only be used where the company has used all available profits and proceeds from the fresh issue of shares.

Step 2 – Directors statement and auditors report

• The directors must make a statement:
  • Specifying the amount of permissible capital payment for the shares.
  • After making a full inquiry into the affairs and prospects of the company, they are able to form the opinion that
    1. There will be no grounds for the company to be unable to pay its debts; and
    2. The company will be able to continue to carry on business as a going concern throughout that year.
  • Any director making this statement will have to ensure that they are making the statement reasonably otherwise there is potential for a criminal offence to have occurred, along with the possibility of being liable to any future liquidators.
  • The statement itself must be in writing and signed by each director at the company, stating that the statement was made under s714 of the CA 2006.
  • It is standard practice that directors should be able to sign a counterpart statement on the same day as the original.
  • The statement has to be annexed to an auditor’s report, who should reach the following conclusions after inquiring into the company’s state of affairs: a) the amount specified in the directors’ statement as to permissible capital payment is properly determined; and there is nothing to be aware of that indicates the directors’ opinions are unreasonable.

Step 3 – Shareholder approval required

• In addition to the buyback contract requiring approval (same as seen in Step 1 under the other two financing methods), a special resolution must be passed before payment out of capital can take place (under s716, for an employee share scheme it is under s720A).
• The special resolution must be passed either:
  • On the same date as the directors’ statement; or
  • Within the week immediately following the statement.
• This can be passed either:
  • As a written resolution: where the directors’ statement, auditors report and written resolution must be sent to all members at the same time. The resolution must be passed within one week of the directors’ statement and should state the date in which it needs to be passed along with what happens if the requisite number of votes isn’t met. The individual with the shares in question won’t be able to vote.
  • At a general meeting: where a copy of the directors’ statement and auditors report must be available for inspection at the meeting (instead of 15 days before). The voting restrictions imposed on the selling shareholder for the buyback contract also apply to voting on paying for the shares out of capital.

Step 4 – Public notice in the London Gazette and a national newspaper

• After the members approve the payment out of capital, within a week of the resolution the company must publish a Gazette notice stating:
  • The approval for the payment out of capital;
  • The amount of capital payment for the shares;
  • Date of the resolution;
  • Location of the directors’ statement and auditors report for inspection; and
  • Creditors may object the resolution within 5 weeks of approval by applying to the court for an order to prevent payment.
• The same notice must also be published in an appropriate national newspaper or notice must be given to all the company’s creditors in writing.
• The directors’ statement and auditors report must be kept available for inspection during the 5 weeks open to creditors to object.

Step 5 – Timing for Payment

• No earlier than 5 weeks and no later than 7 weeks after the resolution date for approving the payment out of capital has passed.

Step 6 – Post-Buyback

• The special resolution approving the payment to occur must be filed at Companies House within 15 days of being passed.
• The directors’ statement and auditors report must be filed at Companies House no later than the earliest of the date to be published in the Gazette or newspaper or the date of the written notice sent to creditors.
• Stamp duty must be paid by the company at the rate of 0.5% on the purchase price for purchases over £1,000 (the SH03 statement of capital form is sent to HMRC for stamping before it is filed at Companies House).
• Accounts will need to be updated to reflect any changes to the company’s issued share capital or reserves.
• The directors will have to send the relevant forms to Companies House including Forms SH03 and SH06, along with details of the shares bought back within 28 days.
• A copy of the contract must be available for 10 years at the company’s registered office once the buyback has been completed.
• The register of members will have to be updated.

Capital treatment

Where the relevant conditions as set out at CTA 2010 s 1033 onwards are met, a company purchase of shares is not be considered an income distribution, but instead capital treatment would prevail.

Capital treatment can only apply to unquoted trading companies (or unquoted holding companies of trading groups), while the buy back must also be wholly or mainly for the benefit of the trade (either the trade of the company making the share purchase or any of its 75% subsidiaries), and it must not be for the avoidance of tax.

The ‘benefit of a trade’ requirement can be particularly subjective and HMRC have offered guidance on this point. This guidance suggests, for example, that a company purchasing shares from a shareholder looking to exit the business may fall within the definition of ‘for the benefit of the trade’.

The legislation allows for advance clearance to be sought that capital treatment will apply to the transaction (CTA 2010 s 1044). Where clearance is obtained, HMRC will confirm that the transaction is considered to be for the benefit of the trade and that all other conditions are met.

Further reading:

Can a company buy back shares for nil consideration

How to sell or buy a private company minority shareholding

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023.