Company Share Buy Backs

What is a company share buy back?

A company share buy back is exactly that – the company buying its own shares back from one or more of its shareholders.  The shares are then either cancelled (so they no longer exist), or are held by the company in treasury.

When would a company want to buy its own shares?

There are a number of reasons why a company share buy back can be a useful tool.  These include:

1. Returning any surplus cash in the business to the shareholders;
2. Increase a company’s gearing (i.e. its ratio of debt to equity); and
3. Providing an alternative exit route for shareholders (for example where a shareholder wishes to sell, but the other shareholders either cannot or do not wish to purchase the shares themselves and do not wish to bring in a third party).

Many of these decisions will be driven by tax advice from the company’s accountant.

Are there restrictions on when a company can buy its own shares?

The ability of a company to buy back its own shares is carefully controlled by the Companies Act.  A buy back can only validly occur provided the company follows the procedure set down by law.  This includes:

1. How it can be funded. There are 2 ways to fund a buy back – either using the company’s available profits, or out of the company’s capital reserves.  As set out further below, the procedure which must be followed for each is quite restricted.
2. Status of the shares. The shares must be fully paid up.
3. The timing of payment. A company is not allowed to agree to payment by instalments (often called deferred consideration).  All of the payment must be made up front.  It is possible to divide the buy back into multiple tranches, but the selling shareholder will still hold all of the shares up to each completion date.
4. The buy back must be authorised by the shareholders in advance.
5. Depending on the sector the company operates in and the size of the share buy back, approval from the government may be required.

In addition, the company’s own articles of association may restrict its ability to buy back its own shares and these must be checked in all cases.

How does a share buy back work?

The procedure for a share buy back varies depending on whether they company is buying back its shares out of available profits, or out of capital.  The procedure for purchasing out of available profits is much quicker and simpler, as the company has enough cash to fund the buyback.  Where a buyback is to be funded out of the company’s capital reserves, additional steps must be taken including publishing a public notice of the intention to use the capital reserves.  Any creditors of the company then has an opportunity to object to the proposed purchase

There are some exceptions where, for example, the buy back is pursuant to an employee share scheme.

In all cases the company will need to have a proper share buy back agreement in place between itself and the selling shareholder(s).

What happens if the share buy back procedure is not followed?

If the correct procedure is not followed then the share buy back will be void.  There are various steps which can be taken to potentially ratify the buy back, however the best course of action is to take proper advice at the outset to ensure that the buy back documents are correctly drawn up.

If you need any advice on company share buy backs, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.