What is a Company Share Buyback?

A limited company may purchase its own shares, known as share buybacks or purchase of own shares. Understanding the intricacies of company share buybacks is important for ensuring compliance and achieving your business objectives. In this guide, we will explain what a company share buyback is, why a company might do it, and how the process works.

What is a company share buyback?

As the name suggests, a company share buyback is when a company repurchases its own shares from either its shareholders or through a stock exchange. In most cases, repurchased shares will be cancelled, increasing the value of the remaining shares. Share buybacks can serve a range of purposes, from providing an exit route for a shareholder to managing employee share schemes.

Why do companies do share buybacks?

There are many reasons why a company may decide to do a share buyback:

• Providing an exit route for shareholders: if a shareholder decides to leave a company, a share buyback is an effective way to enable them to exit without requiring other shareholders or external investors to purchase their shares.
• Returning surplus cash to shareholders: share buybacks can be used to give money back to shareholders if a company finds itself with surplus cash, for example if it has sold a major asset. Share buybacks can be a tax-efficient way to pay shareholders.
• Reducing share capital: if a company cancels shares after buying them back, it increases the remaining shareholders ownership percentage and share of future dividends.
• Managing employee share schemes: share schemes can be an excellent addition to a compensation package. However, issuing new shares for a scheme devalues existing shares. A share buyback enables companies to distribute shares to employees as part of a share scheme without issuing new shares.
• Raise future capital: a company can hold shares that it has acquired through a share buyback as treasury shares, ready to resell or reissue them at a future date – potentially at a higher price – to raise capital.

Off-market vs. on-market purchases

Share buybacks can be categorised as either “off-market” or “on-market” purchases. Off-market purchases occur if the shares are purchased outside of a recognised investment exchange or on a recognised investment exchange but are not subject to a marketing arrangement. On-market purchases involve shares listed under FSMA 2000, or those with facilities for dealings on an exchange without prior permission and without time restrictions.

In practical terms:

• A private company will always make an off-market purchase.
• A public company not traded on a recognised investment exchange will also make an off-market purchase.
• A listed or AIM company may engage in either an on-market or off-market purchase.

As a firm advising owner managed businesses, we deal with off-market share buybacks

Key considerations for share buybacks

Before initiating a share buyback, companies should consider the following:

• Purpose: Determine why the buyback is being undertaken. Common reasons include providing an exit route for shareholders, returning surplus cash to shareholders, or managing employee share schemes.
• Fully Paid Shares: Ensure the shares to be repurchased are fully paid up.
• Company Powers: Check that the company’s articles of association and any shareholders’ agreements permit the buyback.
• Capital Requirements: Verify compliance with CA (Companies Act) 2006, Pt 18 regarding the company’s share capital before and after the buyback.
• Approvals: Beyond the shareholders’ resolution, identify any additional approvals required.
• Substantial Property Transactions: Assess the relevance of CA 2006 provisions related to substantial property transactions.
• Financial Assistance: Ensure the buyback does not constitute unlawful financial assistance.
• Banking Restrictions: Check for any banking facility restrictions affecting the buyback.
• Regulatory Consents: Determine if consent from the Financial Conduct Authority (FCA) or clearance from the Pensions Regulator is needed.
• Tax Implications: Consider any potential tax issues arising from the share buyback.

Financing share buybacks

Companies can finance share buybacks through:

• Distributable profits
• Proceeds from a fresh issue of shares
• Capital in accordance with CA 2006, Pt 18, Ch 5
• Up to £15,000 or 5% of its fully paid share capital per financial year under CA 2006, s692

How do company share buybacks work?

The procedure for share buybacks involves several steps and can be complex. For off-market transactions:

1. Tax and accounting advice should be obtained from the company’s accountants or tax advisors (we do not generally provide tax advice on such matters). Tax clearance from HMRC may be appropriate so that the parties can be certain of the tax position.
2. The form of the share buyback contract should be agreed between the company and the selling shareholder(s).
3. The draft buyback agreement is circulated to the shareholders of the company who are required to pass a resolution to approve the transaction. Care is advised so as to ensure that only those who are eligible vote, and that other Companies Act 2006 rules are not infringed.
4. The buyback agreement is executed, and generally any shares bought back by the company will be cancelled.
5. The purchase price for the shares must be paid in cash at the time of purchase, it cannot be paid by deferred consideration (delayed payment or instalments).
6. Stamp duty is payable on the transfer of shares to the company if the consideration exceeds £1,000 at the rate of 0.5%.
7. The company’s statutory registers need to be updated to reflect the new share capital and removal of members as appropriate, and any revised PSC records.
8. There are also various Companies House filing requirements.
9. The company’s tax adviser or accountant will generally file a return (a letter) at HMRC outlining what has taken place, why, and how it is envisaged it will be dealt with for tax purposes.

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How Scott Bailey LLP can assist you

At Scott Bailey LLP, our company and commercial solicitors in Hampshire are experienced in guiding businesses through the complexities of share buybacks and preparing comprehensive legal paperwork. If you are considering a share buyback, we would be delighted to discuss how we can support your transaction. Please contact Ben Ironmonger, Partner and Head of Company and Commercial, for down to earth advice tailored to your specific business needs.