Following recent consultation, the UK Government has passed legislation implementing changes to the Companies Act 2006, simplifying the requirements for buying back shares.

Share buybacks have become an increasingly common method of facilitating the exit of a shareholder. The sale process can often be simplified as the company will not need to carry out diligence and it may be easier to agree a valuation. Buybacks can also be a sensible way of using spare cash within the company and can assist companies in adjusting their gearing ratios.

Recent amendments to the Companies Act are summarised below.

Authorisation

Previously, a special resolution of the shareholders of a company was required for the approval of the terms of an off-market purchase of own shares. Under the new legislation, an ordinary resolution will suffice (i.e. a majority vote of the shareholders) provided the buyback is not being financed out of capital.

The new legislation also relaxes the authorisation requirement further where the shares are to be purchased for the purposes of an employees' share scheme. In this scenario the authority given under the shareholders' resolution can be general in nature, provided it specifies the maximum number of shares to be acquired, the date on which the authority is to expire and the maximum and minimum prices that may be paid.

Finance

Previously a company had to pay in full for any shares purchased pursuant to a buyback at the time of the purchase. Now, where shares are purchased for the purposes of or pursuant to an employees' share scheme payment can be made in instalments.

Whilst beneficial to the company, it should be noted that an exiting shareholder could potentially be at risk of the company becoming insolvent before the payment of all instalments are made. This risk can be mitigated to a degree through negotiations (e.g. smaller number of instalments, shorter maximum period for completion of all payments etc.).

The requirements under the Act in relation to payment for shares out of capital have also been relaxed in respect of private limited companies purchasing shares for the purposes of or pursuant to an employees' share scheme when approved by a special resolution supported by a solvency statement. The recent amendments remove the requirements for a company to provide a directors statement and auditors report and to publish a public notice of the proposed payment in such cases.

In addition to the existing financing methods, a company is now able to purchase its own shares using small amounts of cash (not exceeding the lower of £15,000 or the value of 5% of its share capital in each financial year), if authorised to do so by its articles of association.

Disposal

Shares purchased by way of a share buyback, including those in a private limited company (save for those financed out of capital, which will be continue to be cancelled automatically), can, if purchased for the purposes of or pursuant to an employees' share scheme, now be held effectively in treasury and redistributed at a later point.

Conclusion

The Government plans to conduct a further review of the legislation in 2016. In the meantime, the amendments set out in the Regulations should be of significant assistance to companies in promoting the direct ownership of shares for employees.