A share buy-back out of reserves is often considered as a way to return value to shareholders, or to allow a complete or partial exit by a particular shareholder. This article addresses 10 of the most common questions we get asked by clients and their tax advisers about the legal issues regarding share buy-backs by UK private limited companies out of reserves. Note that different rules apply if the share buy back is in relation to an employee share scheme, or if the buy-back is to be made out of capital.
1. When is a share buy-back out of reserves available?
The UK's Companies Act 2006 permits a private company (not a plc) to buy back its own shares out of distributable profits, provided that there are no restrictions in its articles, and subject to complying with the procedural requirements set out in the Act.
2. How can a company finance the purchase of its own shares?
A buyback can be funded from: distributable profits (the most common method and procedurally the most straightforward); the proceeds of a fresh issue of shares made for the purpose of financing the buyback, or with cash up to the value in any financial year of the lower of £15,000 and 5% of the company’s share capital.
3. How long does the process take?
There is no timeframe prescribed by statute, and no ‘objection period’ during which third parties can oppose the transaction (unlike a buy-back of shares out of capital). If every director and shareholder is on board, the process can be completed in one day.
4. What are the main legal documents to implement a share buy-back?
The main legal documents are as follows:
- a written contract between the company and the proposed seller, setting out the price and other terms of the buy-back;
- board resolutions to approve the buy-back;
- shareholders’ resolutions to approve the buy-back and the amendment to the articles (if required); and
- the relevant Companies House forms.
Other documents may be required, for example to make adjustments to a shareholders’ agreement.
5. Can the company still complete the buy-back if minority shareholders object?
The threshold for shareholder approval of a share buy-back for private companies has recently been lowered to a simple majority (but note that the exiting shareholder cannot vote). Therefore it may be possible to proceed with the purchase if minority shareholders object, subject to any shareholders’ agreement and any restrictions in the company’s articles of association. In practice, a company would want to consider its options very carefully before going ahead despite objections.
6. Can the company set off debts owed by the shareholder against the purchase price or satisfy the purchase price by transferring assets?
No - the prudent approach is to ensure all payments for repurchased shares are made in full in cash on completion.
7. Can a company pay for the shares in instalments?
The payment for a buy-back of shares cannot be staggered over instalments. It may be possible to have one contract that provides for multiple purchases of shares over a period of time. However, this would need to be subject to the relevant company having sufficient distributable reserves at the time of each buy-back.
8. Will the company need audited accounts or an auditors’ report?
There is no statutory requirement for this. The existence of the relevant distributable profits will need to be demonstrated in the usual way, namely by reference to the latest statutory accounts and/or interim accounts, but these need not be audited.
9. Will the directors need to sign a declaration of solvency?
No, not where the share buy-back is being financed by a company’s distributable profits.
10. What alternative procedures should we consider?
Other ways of returning value to an exiting shareholder may include:
- A buy-back of shares out of capital (which involves a difference procedure under the Companies Act);
- Payment of a dividend, followed by a re-classification of shares so as to make them valueless;
- Re-registration of the company as unlimited – which allows the company’s capital to be reduced;
- A reduction of capital using the solvency statement procedure – which can be used to create reserves, or else to return capital directly by cancelling shares;
- A court-approved scheme of arrangement;
- A sale of shares to a continuing or incoming shareholder; and
- Members’ voluntary liquidation.