By Nick Gabay, Partner. Contact Thomson Snell and Passmore 01892 510000.
New regulations are about to come into force which make it much easier for a company to buy back its shares.
The subject of employees becoming shareholders has been in the news recently as a result of the Chancellor’s proposals regarding employees giving up certain employment rights in return for shares in their employer companies. Under this “employee shareholder” regime, such shares would benefit from generous tax treatment, both on acquisition and on disposal.
Much less publicised is the implementation of regulations which remove some of the difficulties and complexities of a company purchasing its own shares (otherwise known as a “share buy- back”), especially in relation to shares acquired by an employee pursuant to an employees’ share scheme.
These regulations therefore set the scene for the later implementation of the new employee shareholder regime, but they also make the procedure for share buy-backs much easier even if employees do not qualify as employee shareholders under that regime.
This is extremely helpful, as many criticisms of employees’ share schemes in private companies revolve around the difficulty in rewarding an employee for the value of his or her shares if he or she does not wait around for an eventual sale or flotation.
The new regulations make share buy-backs pursuant to employees’ share schemes much easier in the following ways:
- They allow a private company to pay for the shares in instalments over time, rather than having to pay for the shares in one lump sum on completion of the buy-back, which may not have been possible if the company did not have sufficient distributable profits or cash on that date.
- They allow a private company to pay up to £15,000 or 5% of the share capital (whichever is lower) towards share buy-backs in each financial year, regardless of whether the company has sufficient distributable profits.
- The formalities for approving share buy-backs by the shareholders have been simplified.
- If a company does not have sufficient distributable profits to fund a buy-back, it has always been possible to fund it out of capital, but the procedure for this has been quite cumbersome, requiring an auditor’s statement confirming the company’s solvency, advertising the buy-back in the local press and various other formalities. A company may now fund a buy-back related to an employees’ share scheme from capital on the strength of a directors’ solvency statement and a special resolution, which is much less onerous.
- A company may now hold shares bought back in treasury, meaning that the shares no longer have to be cancelled. Being able to hold shares in treasury (which listed public companies are already able to do) will make the operation of employees’ share schemes much easier, compared to having to set up formal employee benefit trusts or issuing new shares upon the exercise of share options.
There are still many formalities which have to be complied with in relation to a company buying back its own shares, but these new regulations make some of those formalities much less burdensome.