As part of its ongoing attempt to make life easier for small to medium sized businesses, the Government has introduced changes to the way private companies may buy back their own shares.

Share buybacks are useful for a number of reasons, including:

  • returning cash to shareholders;
  • providing an exit route for shareholders;
  • facilitating the operation of an employee share scheme;
  • increasing earnings/net assets per share; and
  • enhancing share liquidity.  

However, until recently the red tape and regulation surrounding share buybacks may have put many companies off. Happily, from 30 April 2013 the procedural requirements relevant to share buybacks have been relaxed in some circumstances (as summarised in the table below).

While some of these changes apply to all private companies, a large number apply only to buybacks from employees under employee share schemes. In this context, the term 'employee share scheme' can be summarised as a scheme for encouraging or facilitating share ownership by employees or former employees of a company and/or its corporate group, and various members of their families.

In order to qualify, the scheme must extend to more than just one employee. It will also not cover those who are not 'bona fide employees or former employees', such as non-executive directors or consultants.

Summary of changes

How are shares paid for?

Private companies may now purchase shares up to the value of the lower of £15,000 or 5% of the share capital value in each financial year using cash, whether or not the company has distributable profits available for this purpose. This removes one of the major stumbling blocks for companies wishing to undertake a share buyback, and should prove useful for companies looking to buy back small shareholdings from employees or other minority shareholders.

When does payment need to be made?

The old rules provided that payment for a share buyback had to be made in full on the date the shares were bought back. It was not possible to pay in tranches without very careful legal drafting (with attendant costs). Now, however, companies buying back shares for the purposes of the company’s employee share scheme can pay the purchase price in instalments.

What authorisation is needed?

All share buybacks by private limited companies can now be approved by an ordinary resolution by the shareholders holding more than 50% of the voting share capital (rather than 75% as was previously the case).

Where companies are looking to buy back shares for the purpose of an employee share scheme, they will no longer have to obtain shareholder approval for each individual buyback but will instead be able to obtain a general authority from the shareholders, so reducing the time and expense involved in each individual buyback from departing employees.

What happens to the shares once they have been bought back?

One significant change introduced is that private companies can now choose to hold shares bought back in 'treasury' (ie in reserve), and then at a later date either:

  • sell them for cash; or
  • reissue them to employees under an employee share scheme.

Previously, shares bought back were simply cancelled so that, for example, a new joiner would need to be issued with completely new shares, rather than being able to take over existing ones relinquished by a leaver.

The ability to hold shares in treasury should reduce the need for employee benefit trusts, as the main function of such trusts is often to act as a 'warehouse' for a company’s shares.  

Anything else?

Share buybacks paid for out of capital and for the purposes of an employee share scheme may now be authorised by a special resolution of the shareholders, supported by a directors’ solvency statement. The directors will no longer have to obtain an auditor’s report, so removing some of the burdens in terms of costs faced by a company looking to buy back shares out of capital.

What now?

Companies considering buying back shares using the new provisions will need to review their articles of association in line with the new procedure and make any amendments to these as required, for example, to enable any shares bought back to be held in treasury. Those operating employee share schemes would be well advised to review their scheme rules to consider whether the more relaxed procedure can add any procedural or cost benefits. Any companies which have implemented employee benefit trusts should also consider whether these are still required now that private companies can hold shares in treasury.