Changes to share buy backs

The buy back of shares has historically been a complex and inflexible process to manoeuvre, especially for companies operating employees’ share schemes. In April 2013 changes to the law on buy backs were introduced in an attempt to simplify the buy back process, reduce administrative burdens, increase flexibility and ultimately make employee ownership of shares more attractive, thus more widespread in the economy. But as with most changes brought through in a hurry, they also created some uncertainty.

The key changes to the share buy back process under The Companies Act 2006 (Amendment of Part 18) Regulations 2013

The key changes made in The Companies Act 2006 (Amendment of Part 18) Regulations 2013 included the following:

• Ordinary Resolution
  Shareholder approval: the 2013 Regulations removed the previous requirement for off-market purchases to be approved by Special Resolution (75% majority).  Off market purchases of shares now only require a simple majority vote (unless the company’s articles of association require a higher majority).
• General authority
  The 2013 Regulations also allowed shareholders of any company to give the board “standing” general authority to make off-market purchases of shares in connection with an employee share scheme. Previously each and every share repurchase would need to be individually approved.
• De minimis payments
  The 2013 Regulations introduced a new ability for private companies, provided they have authority in their articles, to buy back small quantities of shares out of capital with cash without having to follow the detailed procedures set out in the Companies Act 2006.  The maximum amount that can be paid using the exemption in any financial year is the lower of (i) £15,000 (ii) the value of 5% of the company’s share capital.
• Paying for shares by instalments
  The 2013 Regulations enable private companies buying back shares in connection with an employee share scheme to pay for the shares by instalments.
• Paying for shares out of capital
  The 2013 Regulations simplified the procedure for private companies financing share buy backs out of capital in connection with employee share schemes by enabling these to be authorised by a special resolution and directors’ solvency statement, removing the requirement of a supporting audit report and directors’ report.

Clarifying legislation

In response to repeated requests for clarification on the application of the Regulations, the Department of Business, Innovation & Skills published guidance and new clarifying legislation was introduced with effect from 6 April 2015 (the 2015 Regulations). Before this clarification, many advisors declined to use the 2013 Regulations, as a consequence of a failure to follow correct procedures is that the buy back is treated as though it had never happened.

Companies will still have to review their articles and share scheme arrangements to check compatibility with the Regulations. However, amongst other things, the 2015 Regulations now mean that:

• A private company wishing to buy back small amounts of shares from capital can do so using the de minimis exemption, up to the aggregate purchase price in a financial year of the lower of £15,000 or the nominal value of 5% of its fully paid share capital calculated at the beginning of the financial year.  This has removed the confusion concerning how to determine the value of the 5% threshold of share capital.
• Under the 2013 Regulations, companies could hold shares in treasury allowing for the buy back of shares from departing employees and ‘warehouse them’ before reselling. The 2015 Regulations have removed the ability to hold shares in treasury when they are bought back from capital under the de minimis rule.
• A buy back under the de minimis provisions should be accounted for in the same way as other buy backs out of capital. Shares can be bought back at a discount or a premium to nominal value, but the overall £15,000 a year cap still applies.
• In relation to certain provisions, the timing between when shares are surrendered and when they must be paid for has been clarified.
• There is no need to provide a statement of capital in circumstances where it would replicate one already delivered.

Conclusion: a clear pathway to employee share ownership

The revisions helped to bring welcome clarity to changes to the buy back regime for private companies introduced by the 2013 Regulations, making it easier to authorise and buy back shares.