How do company buybacks work for private limited companies?

A company buyback or share buyback is when a company buys back, shares from a shareholder. Companies may issue shares in order to raise capital, and each share represents an ownership stake in the company. When a company buys back its shares, the shares can be cancelled or placed into treasury. Most commonly for SME companies, the shares are cancelled which in turn raises the percentages held by the other shareholders (those whose shares have not been bought back by the Company).

A company may wish to buy back shares for a number of reasons. It could be to increase value for their existing shareholders, return unused funds, or to buy out a shareholder who is looking to exit. Shares can be repurchased either out of distributable reserves or capital.

Buying back shares out of distributable reserves

Distributable reserves refer to a company’s profits which are available for the purpose of distribution, for instance, paying dividends. If shares are bought back using distributable reserves, it means a company’s capital is maintained.

A buyback contract should be in place prior to the purchase, containing all of the key terms of the agreement between the company and the selling shareholder(s). The contract will need to be approved by an ordinary resolution, meaning it will need to be passed by members holding at least 51% of the voting shares in the company.

Unless shares are bought back pursuant to an employee’ share scheme, they must be paid for at the time they are purchased.

Buying back shares out of capital

Since the introduction of the solvency statement procedure for reductions of capital in 2008, it is believed that the number of share buybacks out of capital has decreased, as the solvency statement procedure has made it much quicker and easier for private companies to create distributable profits pursuant to a reduction of capital which can then be used to fund a share buyback.

For any buybacks out of capital, the directors of the company must issue a statement including the amount of the capital that will be used to purchase the shares. They must also agree there will be no grounds on which the company could be found unable to pay its debts. If a director makes a statement without having reasonable grounds, they will have committed a criminal offence and could face serious sanctions.

As with buying out of distributable reserves, the buyback contract will need to be approved by shareholders. However, a further special resolution will be needed when buying out of capital, this will require the approval of members holding 75% of the voting shares and should be filed at Companies House within 15 days.

Within a week of the resolution being approved, the company must publish a notice in The Gazette and in an appropriate national newspaper, or give notice to each of its creditors. The directors’ statement and auditor’s report must be available for inspection by any shareholder or creditor for 5 weeks after the date that the resolution was approved.

The payment out of capital must be made no earlier than 5 weeks and no later than 7 weeks after the date of the resolution, and any shares purchased from capital must be cancelled.

If you have any questions about company buybacks, please do not hesitate to contact our solicitors in Bristol on 0117 962 1205, or fill in a contact form.

This article is provided for general information purposes only and represents our understanding of the relevant law and practice as at the date of uploading. This article should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.

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