Company Buyback of Shares
Under a share buyback, a company acquires shares in itself from an existing shareholder(s). A company may wish to undertake a share buyback to return cash to shareholders or to buy out a shareholder seeking an exit.
This article will deal with the process for a limited company to buy back shares from its distributable reserves.
A buyback must (unless a relevant exception applies) follow the procedure in Part 18 of the Companies Act 2006. Failure to do so, could lead to the transaction being void and, potentially, fines on directors.
Broadly, the procedure to follow includes:
- Checking the company’s Articles to ensure there is no prohibition or restriction in respect of share buybacks
- Ensure the shares to be purchased are fully paid up
- Confirm the company has adequate distributable reserves to fund the buyback
- Prepare a contract to document the share buyback and the main terms
- Hold a board meeting of the company to consider the buyback, confirm there are adequate distributable reserves, approve the buyback contract and submit it to the shareholders for approval
- Approval of the buyback contract by the shareholders of the company by special resolution. Note that the shareholder whose shares are being purchased is not entitled to vote on this resolution
- Complete the buyback contract and ensure the consideration is paid
- Deal with filings, ie paying stamp duty on the Form SH03 (Return of Purchase of Own Shares) and filing this, together with Form SH06 (Notice of Cancellation of shares), if the purchased shares are to be cancelled, at Companies House
The company must pay for the shares in full and the buyback agreement cannot provide for deferred consideration. If the company does not have sufficient distributable reserves, the company may need to consider buying back shares in instalments over a period of time.
You will need to ensure that the share buyback is compliant with the tax advice from the company’s tax adviser to ensure the consideration for the share buyback obtains tax treatment as capital gains tax rather than income tax.
For help and advice on a company buyback of shares, please contact the Corporate and Commercial team by emailing email@example.com or calling 0161 926 9969.