Moving forward with the new share buyback regulations

A company may want to consider a buyback of its own shares in a number of circumstances. The Companies Act sets out the procedure which companies must…

A company may want to consider a buyback of its own shares in a number of circumstances, for example:

  1. A current shareholder wishes to sell his shares but it is not able to find a suitable third party
  2. The remaining shareholders are not able to purchase the shares
  3. Returning surplus cash to shareholders
  4. Increasing share liquidity

The Companies Act 2006 sets out the procedure which companies must comply with in order to buyback shares (Buyback Procedure). Recently new regulations have been brought in with the aim of simplifying and increasing the flexibility afforded to companies in respect of the Buyback Procedure (Buyback Regulations).

The principle changes to the Buyback Procedure are as follows:

Shareholder approval

Prior to the Buyback Regulations, authority from shareholders holding at least 75% of the issued share capital of the company was required in order to approve an off-market purchase of its own shares. From 1 May 2013, it is now possible to approve a buyback with an ordinary resolution (more than 50% shareholder approval).

Treasury shares

Although previously only available for listed companies, a private company is now able to hold purchased shares as treasury shares and will not be required to cancel them. Shares held in treasury may be sold to other shareholders or, if purchased pursuant to an employee share scheme, held or allotted to other employees in accordance with the scheme.

Financing the buyback – new cash de minimis provisions

Previously a company was only permitted to buyback shares out of distributable reserves or, if these reserves were not sufficient, out of capital; this was often considered a burdensome process.

However the Buyback Regulations have now introduced the ability for a private company to undertake a small buy back out of cash (not exceeding the lower of £15,000 or 5% of the share capital in any financial year) without a payment having to be identified as being made out of distributable reserves.

Share buybacks in relation to employee share schemes

The Buyback Regulations have relaxed certain requirements where the buyback is for the purposes of, or pursuant to, an employee share scheme. These are:

  1. A company may now be granted authority by the shareholders by simple majority (more than 50%) to purchase the shares within a maximum period of 5 years allowing multiple buy backs to take place without requiring authority for each individual purchase. Such authorisation must be conditional upon the shareholders setting a maximum number of shares which can be bought back and a minimum or maximum price per share bought back under the authority;
  2. The purchase price of the shares bought back from the employees under the share scheme may now be paid for in instalments, easing cash flow; and
  3. Any purchase to be made out of capital now only requires a special resolution of the shareholders (75%) and a solvency statement signed by all the directors.

The changes outlined above create a more flexible buyback procedure which should make it easier for shareholders to exit. That said, a company must ensure that its articles do not prohibit or limit share buybacks and, in particular if the company wishes to use the new cash de minimis provision in the Buyback Regulations (see point 3 above) then the articles will need to explicitly authorise this in order for a company to be able to rely on such a provision.

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