The UK Department for Business, Innovation and Skills (BIS) published on 4 July 2012 the final report from the Nuttall Review of Employee Ownership (the Nuttall Review). It identifies a number of barriers to the creation and uptake of employee ownership arrangements. The Nuttall Review identified significant economic and social benefits in employee ownership, which the UK Government has endorsed.
As a result, the UK Government has published new regulations to deregulate the current share buyback regime, which are to take effect later this year and intend to simplify the current overly burdensome rules.
The Nuttall Review recognises that employee-owned private companies sometimes buy back shares from exiting employees, often with a view to distributing fresh shares to new employees. The current share buyback regime was considered to be overly burdensome for companies and it was recommended that the current provisions be reviewed under the Companies Act 2006 (the CA 2006).Incentivising Employee Ownership Through Share Buybacks
Following the end of a BIS consultation period on the Nuttall Review, during which it sought industry responses, the Government issued its own response and has now published proposed regulations to be implemented into law later this year. The Government has recognised the need to remove barriers perceived as disincentivising further uptake of direct employee ownership. The main amendments proposed to the CA 2006 are as follows:
- Off-market share buybacks may be authorised by an ordinary resolution of shareholders, i.e., by a simple majority vote, regardless of the context.
Where the buyback is for the purposes of, or pursuant to, an employee share scheme, the following proposals will apply:
- Private companies will be entitled to obtain shareholder authorisation in advance for multiple share buybacks, rather than obtaining approval for each individual share purchase contract.
- Private companies will be permitted to pay for bought back shares in installments. There will be no maximum time limit imposed by law for payments.
- Private companies will be able to finance buybacks out of capital, subject to the signing of a solvency statement by the company’s directors and the passing of a special resolution of the shareholders, i.e., by a 75 per cent majority vote.
- Where there is provision in the company’s articles to do so, private companies will be permitted to buy back shares using small amounts of cash (not exceeding £15,000 or 5 per cent of share capital, whichever is lower, in any financial year) that do not have to be identified as distributable reserves. Where there is no such provision, a shareholder special resolution will be required.
- Private companies and unlisted public companies will be allowed to hold shares in treasury on a basis similar to what is already permitted for certain public companies.
Authorisation of a Share Buyback
Private companies may only buy back shares off-market, i.e., not on a regulated investment exchange, if there is a buyback contract that has been authorised by a special resolution of the shareholders (Sections 693-695 of the CA 2006). Such a resolution is needed for each and every buyback. The rationale is that this gives shareholders a high level of oversight of this aspect of the company’s affairs.
Only an ordinary resolution will be required for all buybacks, regardless of whether or not the buyback is made in an employment context. One ordinary resolution may authorise multiple buybacks, each of which does not now require separate prior authorisation by the company’s shareholders.
The rationale for this is that a requirement to obtain only an ordinary—rather than a special—resolution reduces the administrative burden on companies, given the typically higher costs of arranging and administering a special resolution.
Financing Share Buybacks
A private company, when buying back shares, must pay for the shares in full and finance the purchase using distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the share buyback. A private company may, alternatively, use its share capital but, in doing so, is subject to a number of further restrictions, including the passing of a special resolution. The current range of options to finance a share buyback is therefore limited and aimed at protecting the interests of shareholders and creditors of the company.
If shares are purchased for the purposes of, or pursuant to, an employee share scheme, the payment for a buyback of shares by installments over a period of time will be permitted and may be financed, in certain circumstances, out of capital, subject to a directors’ solvency statement and the passing of a special resolution. The payment out of capital must be made no earlier than five weeks and no later than seven weeks after the relevant shares are surrendered.
The removal of the requirement to pay for shares in full at the time of repurchase is designed to give companies more flexibility in financing buybacks.
Following Share Buybacks
When shares have been bought back, they are either cancelled or held in treasury. Only shares that are listed or traded on a regulated market may be held as treasury shares. As a result, private companies must cancel shares following a share buyback and, if a private company subsequently wishes to issue new shares to new or different employees to allow them to participate in the ownership of the company, it must issue fresh shares, for which new shareholder authorisation is generally required. This is both administratively burdensome and costly for a company.
It is proposed that private companies should be able to hold repurchased shares in treasury.
As mentioned above, the Nuttall Review noted, and the Government concurred, that employee ownership has a positive impact on both business and employees. The Review found evidence that employee ownership has the following positive business outcomes:
- Improved business performance, in terms of profitability, productivity and employment growth
- Increased economic resilience; employee-owned businesses outperformed traditional ones during the recessionary period following 2008
- Greater innovation
- Reduced absenteeism.
As a result, the new share buyback regime is seen as a way to assist the growth of small businesses, the success of which are regarded by the UK Government as critical to the United Kingdom’s economic recovery. The new regime is part of a wider scheme to offer flexible options to incentivise the key management and employees of small to medium sized businesses.