Share Buybacks for Private Companies

 

A Share Buyback is likely to be used as a means of providing a shareholder with an exit route from the Company, e.g. where they wish to retire or simply wish to leave the Company, or as a way of returning surplus cash the Company may hold back to their shareholders.

Attwells Solicitors has a lot of experience of acting for companies undertaking share buybacks.  Attwells Solicitors experience is that a share buyback is often used to enable a shareholder to retire.

Requirements

To undertake a share buyback a private limited company must comply with the Companies Act 2006. Failure to comply with these requirements will result in the buyback being held as void, and both the Company and its officers being held as committing an offence under the Act. This can lead to the Company’s officers being potentially liable to incur an unlimited fine or suffer a prison sentence up to two years or indeed both.

It is therefore prudent that the procedure afforded by the 2006 Act is both understood and followed correctly.

Any limited company can buyback its own shares and the legislation does not require a specific provision to be contained within a Company’s Articles.

However, should a Company’s articles expressly prohibit the right to buyback their own shares then the Articles of Association shall need to be amended before the buyback proposal can be completed.

The Agreement

The terms of the share buyback will normally be incorporated within a Share Buyback Agreement. This Agreement shall be made between the Company and the shareholder(s) who are having their shares bought back and would seek to include the following information:

  • Names of Shareholder(s) seeking to sell their shares back.
  • The number and type of shares being sold.
  • The price being paid for the shares.
  • Whether the shares are to be bought in one single completion, or multiple completions where the total shares are bought back in several tranches on particular dates.

It is important to note that shares being bought back by a Company must be paid for at the time they are purchased.

Financing a Share Buyback

A buyback of shares can be financed in any of the following ways:

  • Distributable Profits - The simplest method to fund a share buyback is by making use of a Company’s distributable profits. It is of course prudent to take the advice of an accountant to assess the finances of a Company to ensure sufficient profits are available before relying on this method of finance.
  • New Issue of Shares - It must be clear that the issue of shares is for the purposes of funding the share buyback. It is recommended that to comply with this it is best to undertake the share buyback within a few months of the new shares being issued.
  • Out of Capital - Given that a buyback from capital could be detrimental to the interests of the Company’s creditors, the law provides for additional requirements to be followed in order for such a buyback to be effective.

Approval

To commence a share buyback the Company must obtain shareholder approval either before the agreement is entered into or after the agreement only where the agreement is conditional upon shareholder consent to the terms being provided.

Unless a company’s articles state otherwise, an ordinary resolution of the shareholders shall be sufficient to approve the buyback. If the payment is being made out of capital then do be aware that a separate special resolution will also be required to approve the method of finance being utilised by the Company.

Once approval has been granted there is no time limit as to when this approval can be exercised by the Company.

Attwells Solicitors and Share Buybacks

A share buyback requires expert legal advice. Attwells Solicitors can review the circumstances of your share buyback and advise you to ensure that the process is fast and handled in accordance with law.

Please call Nick Attwell for an initial no-obligation chat and quotation on 0207 722 9898 or 01473 229200 or email Nick at nick.attwell@attwells.com.