Last month the Government published a response to its consultation on the Nuttall Review, which considered the benefits of and barriers to employee owned companies. The Government now plans to amend the Companies Act 2006 to encourage companies to issue shares to employees and make it easier for companies to buy back shares when an employee leaves.

Current law

The Nuttall Review highlighted that the current provisions on share buyback are “overly burdensome” and discourage employee ownership structures.

Currently, for a company to buy back an employee’s shares, the following is required:

  1. Approval from the other shareholders by special resolution (ie 75% approval).
  2. The funds to make payment for the shares being bought back must be from distributable reserves, out of capital or from a fresh issue of shares. Where payment is from capital a report from the company’s auditor is required.
  3. Payment must be made in full at the time of purchase and cannot be made in instalments or deferred.
  4. For private or unquoted public companies, shares that are bought back must be cancelled. Only listed public companies can hold shares bought back in treasury for future use.

The alternative to a company buyback of shares (and cancellation of those shares) is to establish an employee benefit trust to hold shares until another employee can acquire them. The rules surrounding employee benefit trusts are complex and the cost, administration and tax consequences can also act as a deterrent for smaller companies to offer shares to its employees.

Government proposals

Following its consultation, the Government proposes the following changes:

  1. Off-market share buybacks to be approved by ordinary resolution (ie simple majority).
  2. Where the share buyback is for the purposes of or pursuant to an employee share scheme:
    • Allow for prior approval of multiple off-market share buybacks in a single ordinary resolution.
    • Allow for companies to pay in instalments.
    • Allow for private companies to pay for shares out of capital by signing a solvency statement and approving the funding by special resolution.
  3. If a company’s Articles permit, private companies will be allowed to buy back shares using small amounts of cash (not exceeding the lower of £15,000 or the cash equivalent of 5% of share capital in any financial year). The cash will not have to be identified as distributable reserves. Where there is no such provision in the Articles, a special resolution will be required.
  4. Private and unquoted public companies will be allowed to hold shares in treasury (as is currently the case with listed public companies).

The Government has confirmed that the amendments will be implemented this year by secondary legislation and that there will be a post implementation review three years after enactment.

These simpler and more flexible buyback rules are likely to be welcomed by many businesses that have issued or are considering issuing shares to their employees. In line with the new law on employee-shareholder status, which is due to come into force next month, it will be interesting to see whether there will be a rise in employee ownership of companies.