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Buying back shares

Buying back shares

Contents

Maintenance of share capital rule

The directors of a company might decide that they wish to buy back some of the shares in the company. However, this would reduce the share capital of the company. As a general rule, the share capital of a company can't be reduced, i.e. it must be maintained. The issued share capital represents the fund available to pay the company's debts. Limited liability of the shareholders (also known as 'members') means that they aren't personally liable for the company's debts except to the extent of any unpaid amount they should have paid for their shares. This maintenance of capital rule protects creditors from suddenly finding that the fund out of which the company's debts are repaid has been reduced.

The rule that the share capital shouldn't be reduced means that generally the company can't pay the shareholders back the money they have paid for their shares, or buy back these shares. The company can't pay dividends from capital and must only pay them from profits. Also, the company isn't allowed to lend money to people to buy the company's shares (see 'Financial help for buying shares' under Limits on issuing shares for more information).

If the company tries to buy back its own shares, the transaction will generally be void and the officers of the company will be committing an offence. However, there are exceptions to this rule. The rules on buying back the shares by the company ('buyback') were changed in April 2013 to make this easier in certain situations, particularly for employees' share schemes. There are also rules that allow companies to buy back shares that were issued as redeemable shares (see 'Issuing redeemable shares' under Issuing shares for more information).

The rules for buying back shares are complex and you might need professional advice if your company wishes to do this.

In order to buy back its own shares, the company must comply with the procedure set out by law. In addition, the company must be allowed to do so by its articles of association (the company's set of rules). If the articles ban a buyback of shares, they'd have to be changed by special resolution. If that article is an entrenched article (i.e. hard to change), the vote of the special majority would be required (see 'Entrenched articles' under How to form a company for more information). You should also check the articles to see if there are any pre-emption rights applying to transfers, which would mean that the shares would have to be offered to the other shareholders before the company can buy them back.

A company can't buy back so many of its shares that there are no issued shares left. Generally, shares can only be bought back at their nominal value and special rules apply if they were issued at a premium. If the company buys back its own shares, it must fully pay for them at the time of purchase. The company can't pay in instalments, unless the shares are part of an employees' share scheme.

A private limited company can generally only buy back shares using:

  • profits that could otherwise have been distributed to shareholders as dividends; or
  • money from a fresh issue of shares made for the purpose of buying back the shares.

Buying back shares out of profits

The shareholders must approve the contract between the company and the shareholder selling back the shares (this is known as a 'buyback contract'). They can do this by passing an ordinary resolution, unless the articles require a higher majority. The buyback contract must be made available for inspection by the members at the company's registered office at least 15 days before the ordinary resolution is passed. The resolution isn't effective if the shareholder whose shares are being bought back votes, and the resolution wouldn't have been passed had they not exercised the votes attaching to the shares being bought back.

Alternatively, a written resolution may be used, but the shareholder whose shares are being bought isn't eligible to vote on the written resolution.

The shares bought back must have been fully paid for by the shareholder.

Buying back shares out of capital

There are exceptions to the general rule that allow a private company to buy back shares out of capital. These are:

  • where they're paid for with a small cash payment; or
  • where the special procedure set out in the Companies Act 2006 is followed.

Small cash payments

A private company can buy back shares out of capital if:

  • the company pays for them with cash of no more than £15,000 or 5% of the nominal share capital, whichever is the lower amount;
  • the company's articles contain an article specifically allowing the company to do this; and
  • the shares had been fully paid for.

Procedure for private companies buying back own shares out of capital

Apart from where the small payments out of cash exception applies, a company can only buy shares out of capital if there are no distributable profits available to fund the buyback. There are special rules for calculating whether there are any distributable profits available. The company must follow the special procedure set out in the Companies Act 2006.

Directors' statement

Unless the shares being bought back are in an employee's share scheme, the company's directors must make a statement. This statement must specify how much capital will be used to pay for the shares. It should also say that, having fully examined the affairs and prospects of the company, the directors believe that:

  • immediately after the buyback, there will be no grounds for saying that the company is unable to pay its debts; and
  • the company will have enough financial resources to be able to continue to carry on business and pay its debts for the year after the buyback.

An auditor's report must be attached to the directors' statement.

Auditor's report

The auditor's report must state that they've investigated the company's financial position and that in their opinion:

  • the amount specified in the directors' statement as the amount of capital to be used to pay for the shares has been properly determined; and
  • there is nothing to indicate that the directors' opinions in their statements are unreasonable.

Ordinary resolution to approve buyback contract

The shareholders must approve the contract between the company and the shareholder selling back the shares (buyback contract). They can do this by passing an ordinary resolution, unless the articles of association require a higher majority. The buyback contract must be made available for inspection by the shareholders at the company's registered office at least 15 days before the ordinary resolution is passed. The resolution isn't effective if the shareholder whose shares are being bought back votes and the resolution wouldn't have been passed had the shareholder not exercised the votes attaching to the shares being bought back.

Alternatively, a written resolution can be used, but the shareholder whose shares are being bought can't vote on the written resolution.

Approval by special resolution

Where the shares are being bought back out of capital, in addition to the ordinary resolution authorising the buyback of shares, the shareholders must pass a special resolution authorising the payment to be made out of the capital.

The directors' statement must be signed by all the directors either the same day that the resolution to buy back the shares is passed, or within the week immediately before it's passed. Both the directors' statement and the auditor's report (which should be attached) must be made available to the shareholders before the vote. If the vote takes place at a meeting, it can be shown to them at the meeting. If a written resolution is used, the directors' statement and auditor's report must be sent to all eligible shareholders before they sign the resolution.

The shareholder whose shares are being bought back isn't eligible to vote on a written resolution. If the resolution is passed at a general meeting, it's not effective if the shareholder whose shares are being bought back votes and the resolution wouldn't have been passed had the shareholder not exercised the votes attaching to the shares being bought back.

Publishing notices

The company must give notice of the buyback of shares out of capital, so that its creditors have an opportunity to object. Within the week immediately following the date of the resolution, the company must publish a notice in the Gazette ('first notice'), stating:

  • that the company has approved a payment out of capital to buy its own shares;
  • the amount of capital used to pay for the shares;
  • the date of the resolution to pay for the shares out of capital;
  • where the directors' statement and auditor's report can be read;
  • that any creditor of the company can at any time within the 5 weeks immediately following the date of the resolution apply to the court for an order preventing the payment.

Within the week immediately following the date of the resolution, the company must also publish the same notice in an appropriate national newspaper. Alternatively, the company must give written notice of this to each of its creditors ('second notice').

Deliver to the Registrar of Companies House

The company must deliver to Companies House:

  • a copy of the directors' statement and auditor's report no later than the date of publication of the first notice to creditors; and
  • a copy of the special resolution authorising the buyback of shares out of capital within 15 days of the resolution.

Inspection

The company must keep the directors' statement and auditor's report available to be read for at least 5 weeks' after the date of the resolution.

They must be kept:

  • at your company's registered office; or
  • at another place you've chosen (see section 1136 of the Companies Act 2006), or if kept somewhere other than the registered office, Companies House must be notified of the address.

Modified procedure for buyback of shares in employee's share scheme out of capital

Since 30 April 2013, there is a simplified procedure for the company to buy back its shares out of capital for the purposes of an employees' share scheme.

The shareholders must pass a special resolution. The directors needed to sign a solvency statement, which is simpler than the directors' statement and auditor's report normally required for a buyback out of capital. The normal requirements for public notices of the proposed payment don't apply. The shares can be paid for after the purchase or in instalments.

Purchase and cancellation of shares

Unless someone objects to the Court, your company can enter into the contract to buy back the shares after the necessary resolutions are passed. The payment out of capital must be made no earlier than 5 weeks after the date that the resolution to make the payment out of capital is passed, and no more than 7 weeks after that date. The company must fully pay for the shares at the time of purchase.

When the company has bought back the shares, it isn't allowed to keep them and must cancel them. The total nominal share capital (face value of the share capital) of the company is reduced by the nominal value (face value) of the cancelled shares (see Share capital for more information on nominal value of shares).

Return to Companies House

Stamp duty is payable on the buyback (0.5% of the price paid for the shares). The company must complete and sign the Companies House return (Form SH03) stating the number of shares bought, their nominal value and the date of purchase. This return must be sent to HMRC for stamping. It must then be sent to Companies House within 28 days of the buyback.

Once the company has bought the shares back, it must cancel them and tell Companies House of the cancellation within 28 days, using Form SH06. This form includes an updated statement of the company's share capital.

The company must also update its register of members.

Inspection of contract

The company must keep the buyback contract available for inspection for 10 years after the purchase. It must be kept at its registered office or another place that the company has told Companies House about.