A share buyback is a process where a company buys some of its own existing issued share capital back from its shareholders. It forms part of a wider group of similar processes, including reductions of share capital, where the principal aim is to reduce the number of shares in issue and (in most cases) return the value of the shares back to the shareholder.
Historically, the doctrine of the maintenance of capital (i.e. that a company’s share capital is permanent and cannot be reduced, to ensure that its creditors are not misled as to its size) meant that companies were completely prohibited from buying their own shares. The subsequent introduction of methods which, in certain circumstances, allow this to happen has led to the process becoming relatively commonplace.
Why would a company buy its own shares?
There are various reasons why a company may wish to perform a buyback of its own shares. There will be instances where there is a need for a shareholder to sell their shares, but where a purchaser (either an existing shareholder or a third party) cannot be found, for example:
- where the company has a shareholder who wishes to sell their shares and recoup the value attaching to them;
- where the company has a shareholding director/employee who is retiring and wants to ‘cash in’ their shares; or
- where a shareholder dies and their beneficiaries want (or are compelled by the provisions of a shareholders’ agreement) to realise the cash value of the shares rather than becoming shareholders in the company.
A company may wish to reduce the number of shares in issue for other reasons, but might be unable to use one of the other available methods of doing so. For example, the directors may be unwilling to swear the statement of solvency required to perform an administrative reduction of capital, or the shares in question may not have been issued on terms which allow them to be redeemed.
Types of buyback
The type of transaction most commonly associated with the term ‘buyback’ is a purchase by a company of its shares under CA 2006, s.690 – s.708. These provisions enable a company may purchase any of its shares (whether or not they are expressed to be redeemable) by means of a market purchase (PLCs only) or an off-market purchase.
A market purchase is a purchase of shares on the Stock Exchange and must be authorised by ordinary resolution which may give a general authority to purchase the company's own shares, or be limited to shares of a particular class or description. The authority may be unconditional or conditional. The authority cannot last for more than 18 months. It is standard practice in many PLCs to have such a resolution passed at each AGM.
This is any purchase of shares other than through the Stock Exchange. It can include shares in a PLC bought other than through the market, or any buy-back by a private company.
Except where the purchase is in relation to an employee share scheme under The Companies Act 2006 (Amendment of Part 18) Regulations 2013 SI 999, an off-market purchase may be made only if the terms of the contract of purchase are authorised before the company enters into the contract by an ordinary resolution. In most cases this will be under a contract drawn up for the purposes of the buyback, but it may also be done under the terms of a previously authorised 'contingent purchase contract': a contract under which a company may, subject to any conditions, become entitled or obliged to purchase its own shares.
The member whose shares are the subject of such a resolution to approve the purchase of them cannot exercise the votes attached to those shares. The member may, however, exercise any votes on any other shares if the resolution is passed at a meeting on a vote by poll.
The resolution will not be effective unless a copy of the proposed contract of purchase, or a written memorandum of its terms if it is not in writing, is available for inspection by members of the company, both at the registered office for at least 15 days before the date of the meeting at which the resolution is passed, and at the meeting itself.
Where a company has purchased its own shares it must, within 28 days, deliver to the Registrar a return (via form SH03) stating the number and nominal value of those shares and the date they were purchased. Stamp duty must be paid on this form if the consideration paid by the company for the shares is £1,000 or more.
In a private company the shares must be cancelled on buy-back (which is the most common scenario) or held as treasury shares. If cancelled, the company must register another form, SH06, which includes a statement of capital. If held as treasury shares, the voting and dividend rights on the shares cannot be exercised until such time (if ever) that the shares are sold.
The company must keep a copy of any contract to purchase its own shares, or a memorandum of its terms if it was not in writing, at its registered office for 10 years. It must be made available for inspection by members and, if a public company, by any other person.
Redemption of shares
Another way in which a company can buy back its shares is to redeem them. This option is only available if the shares in question were issued on terms making them redeemable (non-redeemable shares cannot be converted to redeemable shares after issue). Under CA 2006, s.684 – s.689 a company can issue shares of any class which are to be redeemed, at the option of the company or the shareholder, subject to the following conditions:
- redeemable shares can be issued only if the company has other shares which are not redeemable; and
- redeemable shares may not be redeemed unless they are fully paid.
Shares redeemed must be cancelled on redemption and the amount of the company's issued capital is diminished by the nominal value of the shares. There are restrictions on the financing of a redemption of shares, which apply also to a company purchasing its own shares.
Financing redemption or purchase of own shares
Subject to the provisions which enable private companies to make payments out of capital in certain circumstances, shares may be redeemed or bought back by a company only out of the distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose (CA 2006 s.692). The 2013 Regulations relaxed these provisions slightly, by allowing a capital payment to be made provided it does not exceed the lower of £15,000 or the value of 5% of the company's share capital. Those regulations also relaxed some of the procedural rules applicable in cases where the buyback is being made for the purposes of an employee-owner scheme (often also known as an ‘employees’ share scheme’).
It is important to for both the company and the seller to take suitable tax advice prior to entering into a share buyback. As mentioned above (and as is the case with any transfer of shares), the company will need to pay stamp duty on the purchase if the consideration for the transaction is more than £1,000, or if the buyback forms part of a series of transactions in which the total consideration payable exceeds £1,000. There is also likely to be an income tax (or in some cases, capital gains tax) liability on the part of the seller in circumstances where the sale price of the shares exceeds the price at which they were originally issued. The company should also determine how the buyback should be financed (e.g. by considering whether it has sufficient revenue reserves to make the purchase out of profits).
As well as submitting the various documents mentioned above to Companies House, the company should amend its register of members (and other relevant registers) to show the updated shareholdings after the purchase has taken place. The share certificate(s) relating to the previous shareholdings should be returned to the company and, if necessary, replacement share certificates issued in respect of any holdings that remain after the completion of the buyback.
Company Law Solutions make buying back shares easy.
- guidance as to the applicable procedures for an off-market purchase
- contracts, minutes, resolutions and notices prepared bespoke for your company
- completed official forms for Companies House
- our straightforward, step by step guide to completing the procedures