The new regulations should help to encourage smaller companies to utilise employee equity arrangements, without the need to use the more complex buyback procedures or an employee benefit trust. The ability to hold shares in treasury will also ease the process of issuing equity to new employees.

The changes stem from proposals for wider employee share ownership resulting from the Nutall review in 2012, which more controversially recommended allowing employees to take shares with tax benefits in return for giving up employment rights. Employee-owned companies can be more profitable, create more jobs and have largely been relatively resilient during the economic downturn. By easing the process of buying back shares from departing employees, companies may be more likely to increase employee equity to incentivise staff.

What is a share buyback?

The purchase by a company of its own shares from one or more of its shareholders.

Why engage in a share buyback?

  • Return surplus cash to shareholders
  • Increase net assets per share
  • Enhanced liquidity
  • Increase marketability
  • Exit route for shareholders (particularly where a minority stake is held)
  • Buy out a dissident shareholder who wishes to sell where fellow shareholders cannot afford to buy
  • Facilitate operation of forced transfer provisions
  • Assist in operation of employee incentive schemes

Previous rules relating to share buybacks out of distributable reserves

  • A special resolution was required (i.e. 75% vote of the shareholders) to approve the buyback
  • Share buyback must be funded at time of purchase
  • Each share buyback requires a new special resolution
  • The company must pay for the shares out of distributable reserves (though in some cases, it may be funded by the proceeds of a fresh issue of shares or out of capital)

Recent changes to share buybacks - taking effect from 30 April 2013

The new regulations simplify the rules governing how a private company can buyback its shares and how it can hold these shares as “treasury shares”. Part of the aim of these changes is to encourage companies to offer equity to employees. The new rules include the following:

  • Only an ordinary resolution is required, needing majority vote of over 50%, to approve the buy back out of distributable reserves
  • Payment for the shares can be made in instalments if in connection to an employees’ share scheme
  • The company may fund a small buyback up to an annual cap of the lower of £15,000 or 5% of the value of the share capital (if authorised by special resolution or in the articles of association) even if distributable reserves are not available
  • Multiple share buyback contracts can be authorised in advance if connected to an employees’ share scheme
  • A buyback in connection with an employees’ share scheme may be financed out of capital by a significantly simplified process involving a solvency statement and special resolution
  • The company may hold treasury shares, which was previously an option only open to public companies. This means the company can purchase its shares but not cancel them allowing them to be held and easily made available to other employees without affecting percentage ownership or having to utilise an employee benefit trust