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Company Law Update: Important changes regarding company share buy backs

Posted
September 27, 2013
Business Law

From 30th April 2013 changes to the Companies Act 2006 (the Act) have been introduced that have simplified the rules surrounding companies buying back their own shares and for the first time private companies can hold their own shares in treasury following a buy back. The main incentive behind the changes is to stimulate employee ownership of companies, and the new rules are advantageous to private companies. Treasury shares Treasury shares are those previously issued to a shareholder or employee which are repurchased and held by the company when that shareholder or employee sells their shares or leaves the company. Treasury shares can then either be sold for cash, transferred to an employee under an employee share scheme or cancelled. Previously, only shares in a listed company or those traded on AIM or a regulated market could be held in treasury, meaning that when a private company bought back its own shares they had to be cancelled, thus reducing the company’s issued share capital. 

The only exception to this was where the company had an employee benefit trust (EBT) which would allow the shares to be warehoused until they were transferred to a new employee. The cost, administration and tax complexities of establishing and maintaining EBT’s often made them an unrealistic option, where the benefits were outweighed by the disadvantages. For the first time private companies can now choose whether to cancel the shares following a buy back or to hold them as treasury shares until they are either sold or transferred to another employee under its employee share scheme. This option will be beneficial to companies where a shareholder or employee wishes to sell their shares, the company does not wish to cancel them, however a new holder for the shares is not yet identified. 

Paying for the buy back Installments - Companies can now pay for shares subject to a buy back in installments rather than in full on purchase of the shares, provided that the buy back is in connection with an employee share scheme. This new rule will undoubtedly assist companies wishing to buy back shares by easing cash flow problems. Simplified procedure - Where the buy back is in connection with an employee share scheme, companies can now buy back shares out of capital using a simplified procedure. Gone are the days of obtaining a directors’ statement and auditors report as under the new procedure only a solvency statement by the directors and a special resolution of the shareholders approving the buy back is required. This new, quick and easy process will no doubt save companies time and money and ease the administrative burden in buying back shares. 

Small cash buy back option - Where the share buy back is worth the lower of £15,000 or the cash equivalent of 5% of its share capital in any financial year, companies are no longer required to finance the buy back out of distributable profit. Provided it is authorised by its articles to do so, the company can pay for the shares using cash without identifying the cash as from distributable reserves. Authorising share buy backs Off-market (private or unlisted public companies) share buy backs can now be authorised with an ordinary resolution (passed if more than 50% of the votes cast are in favour of the resolution) rather than by special resolution which requires a higher majority to pass the resolution. 

This amendment brings off-market share buy backs in line with market purchases. In addition, a single ordinary resolution can now authorise multiple off-market share buy backs, easing the administrative burden in authorising buy backs which will save companies time and money. The buy back must be in connection with an employee share scheme and the resolution must set the conditions under which the shares might be bought back, as well as specifying the price range, maximum number of shares that can be acquired, and the time of expiry of the authorisation (which must be less than five years). Conclusion The changes made to the Act are undoubtedly welcome. It is advantageous for private companies to have the option of holding treasury shares, the simplified process and changes to how the buy back can be funded will save companies time and money and the new rules also encourage the use of employee share schemes. However, companies will need to review their articles of association and employee share schemes to ensure that they can take advantage of the recent changes. If you would like further information on share buy backs, employee share schemes or anything else contained in this article please contact a member of the Business Law team. This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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