Gardner Leader

Companies Purchasing Their Own Shares

For shareholders looking for an exit route, a company share buyback can offer an appropriate mechanism.  It is often used to achieve an exit for a venture capitalist, in succession planning or as part of a solution to a shareholder dispute where the parties agree that a shareholder should leave the company.  The company’s own funds are used to finance the purchase rather than having to find a third party purchaser willing to buy the shares. The potential impact this has on creditors means that company law lays down strict requirements as to when and how a company buyback can be undertaken.

Derek Rodgers, commercial partner at Newbury solicitors Gardner Leader LLP, outlines some of the issues involved with private companies; there are, however, further restrictions relating to public limited companies (PLCs).

Authorisation

The company’s Articles of Association must specifically permit it to purchase its own shares. For most companies formed after 1985 and incorporating Table A regulations, this will not be a problem but must be checked in each case. 

Financing the purchase

The purchase must be financed out of distributable profits, proceeds of a fresh issue of shares or out of capital.  If it is to be financed out of capital, which can only be done after any distributable profits have been exhausted, the procedure which must be followed is more complex. The company’s accountants will advise on the available sources of funding. 

Timing of payment

Payment must be made in full when the shares are purchased by the company and cannot be deferred. For payment to be made in instalments, the shares must be purchased in tranches.

What happens to the shares?

The shares purchased by the company are cancelled and the issued share capital is reduced accordingly.  If, for example, four shareholders each have 25% of the issued shares and the company purchases the whole shareholding of one of them, the three remaining shareholders will each own 33% of the issued shares after the purchase.   The company itself does not become a shareholder.

Shareholder approval

The proposed agreement between the company and the selling shareholder must be approved in advance by a special resolution of the shareholders - the written resolution procedure can be used.  For purchases made out of capital, the shareholders must also be provided with a Statutory Declaration of Solvency by the directors and an auditor’s report.

Filing and stamp duty

The special resolution must be filed at Companies House.  For payments out of capital, the proposed purchase must also be advertised in a national newspaper and the London Gazette, and the purchase must not be completed less than 5 or more than 7 weeks after the date of the resolution to allow creditors time to object.  Once the purchase is completed, a form recording the purchase must be submitted to the Stamp Office with the appropriate stamp duty and then filed at Companies House. The agreement must be kept available for inspection at the company’s registered office for 10 years.

Company law rules are technical and must be strictly observed otherwise the transaction is invalid.  Tax and accounting implications may also arise so specialist advice should always be sought.

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