1 July 2024
For private limited companies, share buybacks are commonly used when:
- a shareholder wants to exit a company on retirement;
- it has been agreed for a shareholder to move on from a company but the remaining shareholders are unable to fund a share purchase; or
- where a company is sitting on surplus cash and the reserves can be used to reduce a shareholding.
What is a share buyback?
A share buyback is where a company uses some of its distributable reserves to purchase some of its issued shares from a shareholder. After the shares are bought back they are usually cancelled, meaning the remaining shareholders are left with a larger share of the Company. Share buybacks are therefore commonly utilised as a form of exit strategy for an outgoing shareholder.
What are the main benefits?
Where a private limited company buys back shares, rather than declaring a dividend, the cash in the hands of the selling shareholder can, subject to certain conditions being met, be treated as capital so liable to capital gains tax rather than income.
By utilising a company’s available distributable reserves, remaining shareholders may not have to secure external or personal funding in order to take control of a company and buy out retiring shareholders.
Risks of a share buyback being void
When implementing a share buyback, certain rules must be followed or the transaction will be void. If a buyback is void, the selling Shareholders would still legally own the shares and in theory would be entitled to any dividends declared since the date of the void share Buyback.
This could be particularly damaging to the remaining shareholders who try to sell a business at a later date only to find they have a void buyback agreement to deal with first.
Ensuring a buyback is not void
Review of articles of association – if the articles do not allow a buyback of own shares, the articles must be amended first. If the articles contain any pre-emption rights on share transfer, these must be adhered to or amended before the buyback can take place.
A buyback contract and shareholder approval – the shareholders will need to see a copy of the buyback contract and must approve the buyback in a general meeting or by written resolution. If the buyback is out of capital, an additional resolutions and transaction documents will be needed.
Funding the buyback – the company must have sufficient distributable reserves, or use its available capital to purchase the shares and they must be paid for at time of purchase. It is possible to structure a buyback over multiple tranches but careful drafting and tax advice is needed to achieve this.
Post-completion administration – following completion, the shares bought back must be cancelled or held in treasury, stamp duty may be payable, company registers must be updated and key documents must be filed with Companies House.
For advice on share buybacks or any other corporate requirements, please contact the corporate and commercial team on 0117 973 3989, by email to info@amdsolicitors.com.
