Share Buy Backs: A Simplified Approach

The independent Nuttall Review on employee ownership and share buy backs published in July 2012  looked at three key aspects surrounding share buy backs being 1) the authorisation of share buy backs, 2) the financing of share buy backs and 3) the holding of repurchased shares in treasury.  Following the review the Government passed new legislation to simplify the share buy back regime for private and unlisted public companies. 

The Companies Act 2006 (Amendment to Part 18) Regulations 2013 ("the Buy Back Regulations") came into force on 30 April 2013 with the aim of increasing flexibility for private and unlisted companies , reducing the administrative burden on buy backs and also to try to make employee ownership more attractive. 

The changes brought about by the Buy Back Regulations can be roughly divided into those that apply to all off market share buy backs and those that apply to a buy back of shares for the purposes of or pursuant to an employees' share scheme.  A summary of each of the key changes is set out below.

Key changes applicable to all off market buy backs

  • Authorisation of share buy backs - A company may now authorise an off-market share buy back by way of an ordinary resolution rather than special resolution i.e. a shareholder resolution that can be passed by a simple majority of shareholders.  In general, this will make it much easier for companies to buy back their own shares.
  • De minimis exemption - Providing that a company is authorised to do so in its articles of association, it may purchase its own shares with cash in any one financial year up to the lower of £15,000 or 5% of the aggregate nominal value of the company's share capital regardless of whether purchase is made out of distributable profits or out of capital.  Companies may wish to consider whether they need to amend their articles of association to allow for this.  This change will make it easier for companies to buy back either small amounts of shares or shares of low value.
  • Treasury shares - Private and unlisted public companies no longer have to cancel shares they buy back; they may instead hold them in treasury so that they can be reissued at a later date.  Guidance provided by the Department for Business Innovation & Skills ("BIS") states that only shares bought back from distributable reserves or out of share capital using the de minimis exemption may be held in treasury.

Key changes applicable to off market buy backs for the purposes of or pursuant to an employees' share scheme

  • Payment by instalments - It used to be the case that a company was required to pay the consideration for the shares it intended to buy back in full at the time of the purchase.  The Buy Back Regulations now enable a company to pay for the shares it buys back in instalments.  This gives greater flexibility to those companies who would struggle to pay for the shares up front.  However, it is advisable for an exiting shareholder to consider and/or take advice before agreeing to payment by instalments, particularly as any future payments may be at risk if the company were to become insolvent. 
  • Multiple buy backs - The Buy Back Regulations permit a company to authorise in advance multiple off market share buy backs for up to five years providing it is approved by an ordinary resolution of the company's shareholders.  The shareholders, by way of the ordinary resolution, can set certain parameters and conditions which these future buy backs must comply with.  For example, the resolution can determine the maximum number of shares that may be acquired and the maximum and minimum prices that may be paid for the shares.   As well as providing companies with greater flexibility to buy back their own shares, it will mean that they will not have to incur the costs of individually approving each buy back contract.    
  • Share buy backs out of capital procedure - The Buy Back Regulations have simplified the requirements that a company must fulfil in order to buy back its own shares out of capital.  Companies are now permitted to finance buy backs out of capital providing they are approved by a special resolution of the shareholders which must be supported by a directors' solvency statement and statement of capital.  In addition, the payment out of capital must also be made no earlier than 5 weeks and no later than 7 weeks after the date the relevant shares are surrendered.  There is no longer a requirement for companies to provide a directors' statement and auditors' report nor is there a requirement for notice of the payment out of capital to be published. 

The latest BIS guidance states that the Government does intend to conduct a full review of the Buy Back Regulations in 2016 to determine whether they have been effective and/or whether there have been any unintended consequences.  However, in the meantime, it is hoped that the new buy back regime should make it easier for employees of private and unlisted companies to sell their shares and for such companies to be able to fund the share buy back. 

Posted on: 30/01/2014

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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