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Share Buybacks: part 2 - Procedure and financing

View profile for Ben Hills
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In part one of my article on share buybacks, I focused on the potential advantages of them for companies. I will now turn my attention to the procedure involved and the issue of financing them.

Procedure  

Share buybacks are governed by Part 18 of the Companies Act 2006, which outlines prerequisite conditions for a successful legal share buyback. Before moving on a share buyback, you should read your company’s Articles of Association, and any Shareholder Agreements, to check for any restrictions or prohibitions that must be overcome before a successfully buyback can occur.

In general, the shares that are bought back must be fully paid for by the company. The resolution authorising the terms of the contract to buy back the shares must be made before that contract is entered into by anyone wishing to sell their shares to the company or, instead, the contract must say that no shares will be purchased until the terms have been authorised by the company. The contract for the Buyback must be retained by the company for minimum of ten years after the resolution is passed.

The resolution authorising the buyback must be formally approved through a vote by shareholders, excluding those members of the company who hold the shares that are the subject of the buyback. If any of those excluded votes, even by proxy, then the resolution is not effective and the buyback is at risk of being unwound entirely. You can propose the buyback resolution either in writing or at a general meeting, but formal approval should be secured by all the eligible shareholders before the buyback happens. Furthermore, all shareholders must be made aware that the buyback is occurring, to avoid potential problems going forward. The company will pay stamp duty at 0.5% of the value of the shares being bought back.

A word of warning: the above is very important. While it’s unnecessary to get unanimous consent to a share buyback from all shareholders, you should alert all shareholders that a buyback is on the table. By only notifying those shareholders necessary to secure a passing of the buyback resolution, you may be infringing other shareholders’ pre-emption rights – such as those to purchase the shares first, ahead of the company. Effectively, you must give all the other shareholders the right to turn the shares down before continuing with the buyback.

Financing

You can finance a share buyback in three different ways:

  1. Using Distributable Profits or accumulated reserves

Instead of distributing profits in the form of dividends or other payments, you may use your company’s profits or accumulated reserves to buy back shares. This simple and effective method is the most common way to achieve a share buyback for a private company.

  1. Issuing of New Shares

A buyback of shares can be financed by issuing new shares. However, you must demonstrate that the purpose of the new shares is solely to finance the buyback and this is best achieved by enacting the buyback a short time after the new issuing, to provide a clear link between them. You must also ensure that the new shareholders are registered before the buyback happens.

  1. Using the Company’s Capital

You can potentially use some of your company’s capital to finance a buyback. However, this is the most complicated method available. Paying for a buyback with company capital could potentially prejudice your company’s creditors and so there is a more regulated procedure, detailed under Chapter 5 of Part 18 of the Companies Act, for doing so.

The exception is if the number of shares to be bought back is equivalent to either 5% of the fully paid share capital or £15,000, whichever is lower. If your buyback meets either of these criteria, then the Chapter 5 procedure is not necessary. 

Conclusion

Share buybacks are a powerful tool for any company but may not be suitable in every circumstance. Equally, the procedure for a successful buyback is intricate and easy to get wrong, demanding specialist knowledge and a keen eye for detail. There is also the risk of creating disaffection among shareholders or having transactions unwound entirely if the groundwork and execution is not handled professionally. However, share buybacks can provide a number of advantages for your company, including the potential increase in its share-price, the creation of an avenue to help a shareholder exit the company, and the ability to increase your gearing to attract investors. It can also be flexibly financed with company funds.

If you are interested in enacting a share buyback at your company, then feel free to get in touch with our Company Commercial team on 01733 888888.

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