Share buybacks – overview for “off-market” purchases by a company of its own shares
A limited company may purchase shares in itself known as share buybacks or CPOS (company purchase of own shares)
“Off market” or “On Market” Purchase
A share buyback is “off-market” if the shares are:
- purchased otherwise than on a recognised investment exchange, or
- purchased on a recognised investment exchange, but are not subject to a marketing arrangement on the exchange
A company’s shares are subject to a marketing arrangement on a recognised investment exchange if they are admitted to the Official List (i.e. listed under FSMA 2000, Pt VI (FSMA 2000, ss 73A–103)). They are also subject to such a marketing arrangement if the company has been afforded facilities for dealings in the shares to take place on that exchange:
- without prior permission for individual transactions from the authority governing that exchange, and
- without limit as to the time during which those facilities are to be available.
In practice, the definitions of “off-market” and “on-market” purchase mean that:
- a private company carrying out a share buyback will always make an “off-market” purchase
- a public company that does not have its shares traded on a recognised investment exchange will always make an “off-market” purchase, and
- a listed company or an AIM company may make an “on-market” purchase or an “off-market” purchase.
What should you consider and check before commencing company buyback of shares?
- reasons for undertaking the share buybacks – for instance, is it to provide an exit route to a shareholder or return surplus cash to shareholders or perhaps related to an employees’ share scheme?
- check the shares to be repurchased by the company are fully paid up before proceeding.
- does company have the power to undertake a share buyback? Check articles of association and any shareholders’ agreement.
- will the company’s share capital meets the requirements for a share buyback laid down by CA 2006, Pt 18 and will it do so after the purchase of its own shares?
- in addition to the required shareholders resolution authorising the share buyback, are there any other approvals that may be needed?
- the relevance to the share buyback of the CA 2006 provisions relating to substantial property transactions
- will any aspect of the share buyback constitute unlawful financial assistance?
- do the company’s banking facilities contain any restrictions that could affect the share buyback?
- is consent needed from the Financial Conduct Authority (FCA) in relation to the share buyback?
- Will the share buyback require any clearance from the Pensions Regulator?
- any potential tax issues arising in relation to the share
How does a company finance share buybacks?
- out of its distributable profits
- out of the proceeds of a fresh issue of shares made for the purpose of financing share buybacks
- out of capital in accordance with CA 2006, Pt 18, Ch 5, or
- out of capital under CA 2006, s 692(1ZA)up to an aggregate purchase price in a financial year not exceeding the lower of £15,000 or the nominal value of 5% of its fully paid share capital as at the beginning of the financial year (such value to be calculated in accordance with the CA 2006)
Procedure for share buybacks
Transactions involving share buybacks can be a complex and require various procedural steps to be taken.
In brief, for “off market” transactions, these will be either:
- pursuant to a written contract that is authorised by a shareholders’ resolution before the share buyback takes place, or
- if the share buyback relates to an employees’ share scheme, if it has first been authorised by a shareholders’ resolution.
The key step is obtaining shareholder authority for the buyback.
Procedures will be transaction specific and further details on this aspects falls outside the scope of this article.
Post share buyback steps
- the shares that are bought back must be cancelled or held in treasury (they may only be held in treasury where the share buyback has been financed out of distributable profits).
- any stamp duty payable in relation to the share buyback must be paid by the company to HMRC within required time limits.
- all Companies House filings required as a result of the share buyback must be made within required time limits.
- the company’s physical statutory registers need to be written up to reflect the new share capital of the company, shareholdings of the members, change to PSCs (persons of significant control) and any change to the directors (for instance, where a shareholder exits as a consequence of the company’s repurchase of its own shares).
If you have a potential share buyback transaction we would be happy to discuss with you how we can help. Please contact Wayne Spolander (Partner; Solicitor), a specialist in the law relating to share buybacks. Wayne can be contacted direct using:
Direct dial: 01202 057739
How can we help?
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