Considering buying back your own shares? Here’s what you need to know

There are a number of reasons why you might want to buy back your company’s own shares.

You may wish to buy out shareholders looking to exit the business, wish to return surplus cash to shareholders, or improve earnings per share ratio.

However, as with any transaction, there are a number of factors you need to consider before moving forward.

Things to consider before buying back your company’s shares

A key element to consider before buying back your company’s shares is whether the transaction is permitted in the Articles of Association.

If the articles contain a restriction or prohibition against buybacks, your purchase will not be permitted. There must also be express permission in the articles if you intend to use the de minimis exemption.

You will also need to comply with (or, alternatively, waive) any pre-emption rights in the company’s articles or any shareholders agreement. Otherwise, pre-emption rights can be amended or removed prior to the buyback taking place.

As a minimum, the share buyback contract should set out the main terms of the transaction, including the name of the selling shareholder(s), the number/class of shares being sold, and the price to be paid.

Additionally, your company can only buy back shares that are fully paid. At least one non-redeemable share must remain in issue after the buyback has taken place.

Other factors you need to consider include:

• Approval:A share buyback must be approved by the company’s members, either by written resolution or a resolution in a general meeting. A member holding the shares being acquired is not an eligible and cannot vote on the resolution relating to their share buyback.
• Payment: Statute requires any shares bought by a company as part of a share buyback to be paid for at the time they are purchased. This principle of “cash on completion” means that it is not possible for the payment to be deferred or paid in instalments.
• Multiple buybacks: If you can’t pay for the shares in one go on completion, then it is possible for a buyback contract to provide for a number of buybacks in stages or tranches. If the buyback is funded out of distributable profits, then the company must have sufficient distributable profits to pay for each individual tranche of shares at the time of each buyback.

Cancel shares or hold in treasury?

Shares that are the subject of a buyback can be cancelled or held in treasury.

Treasury is a “share storage” where the shares are held by the company itself (the company needs to be registered as the holder of the treasury shares).

Those shares can be transferred or sold by the company at a later date rather than being cancelled. Holding shares in treasury is only possible if the buyback has been done out of distributable profits.

The company holds the treasury shares but cannot exercise voting rights and is not entitled to any dividends or capital distributions, if any are made by the company. Shares held in treasury can be cancelled at any time.

The company may transfer the treasury shares at any time for cash consideration unless the transfer is pursuant to an employee share scheme, in which case consideration is not required.

Any treasury shares sold this way are treated, for tax purposes, as if they were freshly issued shares and generally therefore don’t attract stamp duty on the initial resale.

Stamp duty treatment on the buyback is the same for shares held in treasury as it is with shares which are subsequently cancelled.

 Make sure you meet your statutory obligations

Following the buyback, you should attend to the payment of any relevant stamp duty, the relevant filings at Companies House, and the updating of the company’s statutory books, including any required changes to the PSC register (Persons with significant control).

Ensuring you comply with the statutory requirements of a buyback will allow you to move forward in the full knowledge that there is no comeback on the company or its directors and will enable you to draw a line under the process.

The last thing you want is to have to incur the time and expense of unravelling a void transaction!

At Palmers Solicitors, our Corporate and Commercial lawyers will make sure no stone is left unturned in your share buyback.

With a wealth of experience advising businesses just like yours, we can support you with all aspects of your commercial transactions.

For tailored advice and guidance on buying back your company’s shares, please get in touch.