By Nicholas Gabay, Partner. Article first published in Construction Manager online 2 June 2013.
1. What are the changes?
New regulations have come into force which make it much easier for a company to buy back its own shares, particularly in relation to shares acquired pursuant to an employees’ share scheme. These regulations seek to underpin the Government’s drive to incentivise businesses to share the benefits of profitable enterprise with their employees.
2. Why are they important?
By its very definition, a private company cannot offer its shares to the public, so it may be difficult for an employee shareholder to find someone willing to buy his shares if he wishes to dispose of them. The opportunity to sell the shares back to the company is therefore an attractive solution if say the shareholder wants to leave. Before these new regulations came into force, even if the directors wanted the company to buy back the employee’s shares, they may not have been able to comply with the stringent requirements for the company to complete the buy-back.
3. How do they work?
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 be possible if the company does not have sufficient distributable profits or cash on that date.
They also 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 also been simplified.
4. Buy-back funding made easier.
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.
5. 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.