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Share Buybacks - 18th June 2013 - Click for larger version Share Buybacks - 18th June 2013

Share Buybacks

A company may “buyback” its shares from shareholders in accordance with terms laid down in the Companies Act 2006. However, there has been a recent change (with effect on 30th April 2013) in the procedure for effecting share buybacks implemented with a view to simplifying the procedure. Where the procedure is not adhered to, any purported buyback will be deemed void. This note will comment only on the buyback procedure, past and present, for private limited companies.

Pre-30th April 2013

Previously, a private company could effect an “off-market” buyback of its shares (i.e. otherwise than via a recognised investment exchange) by obtaining the consent of 75% of the company’s remaining shareholders (i.e. excluding those shareholder(s) whose shares were subject to the purchase). The company would simply enter into a private contract with the selling shareholder(s) and pay the agreed price for the shares and the buyback would be complete. The company could pay the purchase price (i) out of capital (ii) out of distributable profits or (iii) out of the proceeds of a fresh issue of shares made for the purpose of financing the buyback. Upon completion of the transaction, the shares required to be cancelled and could not be sold/transferred to other parties.

Post-30th April 2013

The following changes have now been made in order to simplify the buyback procedure for private companies:
• The consent of only 50% of the remaining shareholders is required;
• In terms of payment of the purchase price, subject to an amendment being made to the company’s articles of association, a company now has a fourth option in that it can pay with cash (not exceeding the equivalent value of 5% of the total share capital of the company in any financial year or £15,000, whichever is lower); and
• Unless the buyback is funded by option (i) i.e. out of capital, private companies will no longer be required to cancel shares upon completion of the buyback, they will be permitted to hold them in treasury and sell/transfer them to other parties.

Employee Ownership Schemes

The main purpose behind the legislative changes was to encourage use of employee ownership schemes. In order to make the administering of these schemes less burdensome for companies, the following further changes have been made in relation to off-market share buybacks:

• The company can obtain authority of its shareholders in advance for the purpose of multiple buybacks which shall remain valid for a period of 5 years (similar to the existing pre-authorisation for share allotments) thereby avoiding the need to have each buyback approved at the time it is effected; and

• The company can pay the selling shareholder (the employee) by instalments for such period and on such terms as the parties agree.

It is imperative that share buybacks are conducted in accordance with the legislative procedure as failure to do so can render the transaction void. If you are considering a share buyback, please get in touch and we would be happy to provide detailed advice.

Last updated: 3.20pm, Tuesday 18th June 2013

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