On 15 February 2013, the Department of Business, Innovation and Skills (BIS) published the Government response to its consultation on the implementation of the Nuttall Review recommendation on share buybacks.
The consultation took place between 30 October and 16 November 2012 and a number of proposals for change were reviewed and accepted. The response outlines the action proposed by the Government following the consultation. The Government intends to enact secondary legislation to make the necessary changes to the Companies Act 2006 in 2013.
Nuttall Review recommendation on share buybacks
The Nuttall Review of Employee Ownership, published on 4 July 2012 (Review), concluded that there were a number of unnecessarily onerous company law provisions relating to buyback arrangements. Specifically, the Review recommended a consultation on the operation of internal share markets to support companies using direct employee share ownership. The Review looked at enabling private companies to hold treasury shares and facilitating share buybacks. The Review did, however, also highlight the simplicity of using an employee benefit trust to enable employee ownership.
The Government's consultation (which took place between 30 October and 16 November 2012) requested views on a number of issues including the extent to which the existing rules on buybacks act as an impediment to employee ownership, what changes to the rules could be made and the benefits of extending the rules on treasury shares to private companies. The consultation received 48 responses - the response sets out a summary of these, alongside the Government's formal response to the consultation.
The Government response
The Government intends to implement the following proposals:
- lowering the threshold required for shareholder approval for a buyback by a private limited company to an ordinary resolution rather than a special resolution
- extending the ability to authorise in advance multiple share buyback contracts to private limited companies but only where the buyback is connected to an employees' share scheme. The current notice periods for displaying resolutions will be retained to provide transparency for shareholders
- allowing private limited companies the flexibility to pay for shares in instalments where the buyback is connected to an employees' share scheme. There will not be any time limits imposed under the legislation for completing payments – the time frame can be agreed between the company and the seller
- allowing private limited companies seeking to buy back shares in connection with an employees' share scheme to finance the purchase out of capital, subject to approval by special resolution and the signing of a solvency statement
- taking forward an amended version of the "de minimis" proposal by allowing private limited companies seeking to buy back small numbers of shares (the lower of shares with a value of £15,000 or the equivalent of 5% of share capital in any financial year) without having to specify that the cash is from distributable profits, where there is provision in the company's articles of association to do so or by way of a special resolution if the articles do not include the relevant provision, and
- allowing private limited companies and unlisted public companies to hold their shares in treasury, on a similar basis as permitted public companies can.
The necessary legislative changes will come into force during 2013.
The Government plans to conduct a review three years after enactment to consider if:
- authorisation of share buybacks by ordinary resolution (and in the case of buybacks in connection with employees' share schemes, prior authorisation of multiple buybacks) has had any adverse consequences and if there is a case for allowing short notice resolutions
- the ability to pay by instalments has been used appropriately or whether departing shareholders and creditors have been disadvantaged, and if further legislation is required to remove or regulate this provision
- the proposals for simplifying the requirements for financing buybacks out of capital and for deregulating the buyback of small amounts of shares have been effective
- there have been any adverse impacts from extending the ability to hold treasury shares to all limited companies, and if there are any merits in allowing shares bought back out of capital or from fresh issue to be held as treasury shares, and
- there is evidence of any monetised or non-monetised costs or benefits from the changes made.
These proposals will help private limited companies manage employee share ownership but will not necessarily remove the need for an employee benefit trust.