What are the key considerations when it comes to share buy-backs?  

Private limited companies may wish to buy back some of their shares for numerous reasons, but directors need to be careful to ensure that the correct procedure is followed in order to do so. Companies can issue shares with relative ease, but buying-back shares is not so straightforward. This article will provide an overview of the steps a private limited company must follow to buy-back its own shares.

It is important that a company is aware of the requirements as the consequences of non-compliance are significant. Not only will the buy-back be void (with the selling shareholder being required to return any payment already received), but the company’s directors may also be personally liable for a breach of duty.

Financing the Share Buy-back:

Before commencing a potential share buy-back process, it is vital that the company considers how it is going to finance the proposed buy-back. This article focuses on share buy-backs out of distributable profits as this is the most common method used. The alternative methods include a buy-back out of capital or through the issue of new shares.

Most share buy-backs must be paid for on the date of the buy-back itself. This means that the company needs to have the means to pay for the shares in full. The only exception to this rule is for buy-backs of shares subject to employee share schemes. Payment for the buy-back must also be made in cash and cannot be made through the transfer of business, property or other assets. If the company does not have the funds to pay the full consideration on day 1 then it may have to consider buying-back the shares in tranches.

The company must also assess whether it has sufficient distributable profits to proceed with the buy-back. As a buy-back from distributable profits is a form of distribution by the company, the considerations are the same as when declaring a dividend. Therefore, the directors must review the company’s latest annual accounts, as well as the performance of the company since the date of those accounts. The directors must also factor in any contingent liabilities such as debts that have not yet crystallised or any guarantees that have not been enforced.

If the buy-back would affect the company’s ability to meet its current and contingent liabilities, then the directors will need to consider a buy-back from capital or through the issue of new shares.

Process:

A share buy-back must be approved by the company’s shareholders via an ordinary resolution (e.g. more than 50% of the company’s shareholders voting in favour). The directors can choose to obtain this approval at a general meeting or via a written resolution.

Before the circulation of the notice of a general meeting or written resolution, the directors will need to check that there are no restrictions on share buy-backs contained in the company’s articles of association. If the company’s articles do not contain any such restrictions, the company is deemed to be permitted to carry out a share buy-back.

A written contract between the company and the selling shareholder setting out the terms of the share buy-back will also need to be prepared. This contract must be available for inspection at the company’s registered office for a period of at least 15 days prior to the general meeting, or should be sent alongside the written resolution when it is circulated to the shareholders.

Stamp duty will also need to be paid by the company where the consideration for the buy-back is above £1,000. As at the date of this article, this will be charged at 0.5% of the consideration.

Other considerations:

In addition to the points made above, directors are well advised to keep the following additional topics in mind when considering a share buy-back:

1. pre-emption rights;
2. fully paid up shares; and
3. class consents.

A pre-emption right is a right of first refusal for the other shareholders in a company when there is a proposed transfer of shares of that company. The directors will need to consider if there any applicable pre-emption rights that apply to the share buy-back and, if so, how to disapply them. This may be through a waiver or a statutory disapplication by way of a special resolution.

In relation to fully paid up shares, it is important to note that a company cannot buy back any shares that are not fully paid. The selling shareholder must, therefore, ensure that their shares are fully paid in advance of the buy-back.

Finally, the directors will need to consider if there are any class consents required from holders of certain shares (for example, preference shares). These share classes often have the right to vote on matters such as buy-backs, so it is important to ensure that any consents are obtained in advance in order to avoid the risk of the buy-back being void.

If you require any assistance in implementing a share buy-back, please contact Joseph Hartland on 01892 510000 or joseph.hartland@ts-p.co.uk