Newsletter 2013 Issue 03

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Purchase of own shares - changes to the statutory rules

The Companies Act 2006 (Amendment of Part 18) Regulations 2013 SI 999 have made some significant changes to CA 2006, Part 18, Chapter 4 with regard to companies buying their own shares. The changes were brought about to facilitate the government's “employee-owners” scheme. Some of the changes apply only when the buy-back is for the purposes of an employees' share scheme, making it easier for the company to buy back shares where an employee leaves the company's employ. Other changes apply to buy backs generally.

Company Law Solutions provides an expert service for companies buying their own shares and all other share capital requirements.

Changes applying to all buy backs

  1. Ordinary resolution not special

    The most significant change is that approval of an off-market contract now requires the sanction of only an ordinary resolution of the members, rather than a special one. This is done by amending CA 2006 sec694, sec697 and sec700 by deleting the word “special” in various places. The rule in sec695 that the voting rights on the shares being purchased cannot be exercised on the resolution has not been changed.

  2. Easing the rules on financing a buy back

    The very tight restrictions on the financing of a buy back are relaxed slightly. Sec692 provides that the funding must come from distributable profits or the proceeds of a fresh issue of shares, unless a capital payment is made under the strict rules of Chapter 5 of the Act. These rules are relaxed by amending sec692 to provide that the buy back may be financed out of cash up to the lower of £15,000 or the value of 5% of the company's share capital, provided the articles so allow. As this is a new provision, the articles of existing companies will practically always have to be amended to permit this.

  3. Treasury shares

    Treasury shares are shares held by the company itself, subject to the provisions of CA 2006, Chapter 6. Treasury shares were introduced for the purposes of companies listed on the stock exchange, the Alternative Investment Market or other authorised markets, and were restricted to such “qualifying shares” and so, essentially to public companies. This restriction is repealed, so private companies can now hold treasury shares in themselves. This gives such companies the option when shares are bought back, either to cancel them or to hold them as treasury shares. While so held, the voting and dividend rights on the shares cannot be exercised until such time (if ever) that the shares are sold.

Changes applying only to employees' share schemes

  1. Payment by instalments

    CA 2006 sec691(2) provides that where a company purchases its own shares, the shares must be paid for on purchase, thus preventing payment by instalments on a buy back. That provision has been amended so that it doesn't apply to a buy back for the purposes of an employees' share scheme.

  2. Authorising a company to buy its own shares

    The long established rules for a company making an off-market purchase of its own shares is that the terms of the buy back must be approved by a (formerly special, now ordinary) resolution. Buy backs for the purposes of an employees' share scheme still require such authorisation but the resolution need not relate to a particular transaction, and may be general, or limited to a particular class or description of shares. It may (but need not) impose conditions. The resolution must specify the maximum number of shares that may be purchased and must specify the minimum and maximum prices that may be paid (though these may be determined by reference to a formula, rather than being fixed sums). The resolution must specify a time limit that cannot exceed five years. The resolution may be varied, revoked or renewed by a similar resolution.

  3. Simpler procedure for making a capital payment

    The general rules are only slightly modified to finance an off market purchase out of capital for the purposes of an employees' share scheme. Any available distributable profits must be used first, the directors must make a solvency statement and the capital payment must be authorised by a special resolution. The rules are relaxed, however, in that no supporting statement by the company's auditors is required, and the proposed payment is not required to be advertised in the Gazette and either a national newspaper or by writing to all the creditors.

The changes came into effect on 30th. April 2013.