When might a company wish to buy-back its own shares?
- A company may, under the provisions of its articles of association or under the provisions of its shareholders agreement, set out within the transfer provisions that on any proposed transfer of shares or on certain trigger events taking place, the Company has a right to buy-back shares issued to shareholders
- If the company wishes to acquire shares from a selling shareholder, or a selling shareholder has approached the company to enquire as to a buy-back, without any specific requirement to do so within the articles or shareholders agreement
- When the company decides to use the buy-back process as a way of reducing its share capital account
- When the company decides that it is in a position to return capital to its shareholders.
What are the requirements?
There are several considerations that the company must undertake prior to commencing the buy-back:
- The company’s articles must not contain a prohibition of a buy-back of the company’s shares (prior to the Companies Act 2006 the articles had to contain an express provision that the company could undertake a buy-back), if there is such a restriction then the company will need to consider whether a special resolution of the members to amend the articles would be appropriate
- The company must be able to pay the consideration for the shares on completion – it cannot defer the payment of consideration
- At least one non-redeemable share must remain in the company after the buy-back, so a company cannot buy-back all of its shares
- The shares being bought back must be fully paid shares before the buy-back
- Payment can be made using one of several means:
- out of distributable profits of the company – this is the easiest and preferred means;
- out of the proceeds from a fresh issue of shares in the company
- out of capital subject to the aggregate purchase price in any one financial year being the lower of £15,000 or 5% of the aggregate nominal value of its fully paid up share capital as at the beginning of the financial year
- by a permissible capital payment – only to be utilised if none of the other options are available and subject to stringent and enhanced procedures – this is the most complex of the buy-back consideration mechanisms.
A company must utilise either the distributable profits or proceeds from a fresh issue of shares mechanisms if available before considering using the capital routes.
- The Company must have a record of the buy-back terms – which it must keep a copy of with its registers and records for 10 years after the buy-back
- There must be a shareholder resolution – an ordinary resolution of the shareholders unless the company’s articles need to be amended.
What are the Tax Considerations?
The selling shareholder will need to consider their own tax liability on any profit made on the sale of the shares in the same way they would on the sale of the shares to any other person or body.
The company will need to pay the usual stamp duty payable on any share transfer (0.5% rounded up to the nearest £5 unless an exemption applies).
What happens after completing the Buy-Back?
Once the buy-back has completed the company will need to submit the required form (SH03) to the Revenue along with the stamp duty payment (unless exempt) and then upon stamping the form will need to be sent to the Registrar of Companies for filing. The shares can then either be held in Treasury or cancelled. If the shares are to be cancelled, a cancellation notice (SH06) will also need to be sent to the Registrar of Companies for filing. The company’s register of members will also need to be updated as appropriate.