Buy-Back Of Shares In A Private Limited Company

A share buy back is when a company buy back their own shares from the market.

Those shares may then be cancelled, reducing the share capital, or retained in treasuring to be transferred to a shareholder in the future.

Why do a buy-back?

A Company may choose to effect a buy back for many reasons, including:

• Company consolidation
• Equity value increase for certain shareholders
• Realising the value of shares using cash available in the company
• To exit a shareholder (this is one of the most common reasons this is used!)

How is a share buy back funded?

There are strict regulations under the Companies Act 2006 which control how a buy-back of shares can be funded. For one, unlike a transfer between shareholders a buy-back must be paid for on completion and payment cannot be deferred. There are alternative structures that you can use to stage payments, but this involves buying back shares in tranches and isn’t ideal.

The Company can use its post-tax distributable reserves to pay for the purchase of its own shares, or it may issue fresh shares for the purpose of financing the buy back, however, it cannot use the share premium itself as distributable profits to purchase the buy back shares.

There is a solution where the share premium may be converted into a profit and loss reserve by way of a capital reduction, creating distributable reserves that can then be used to buy back shares. This is a more complex process whereby all of the directors of the company will need to sign a solvency statement, making it clear that the company is solvent before doing so. Doing a buy-back out of capital is a complex process with more hurdles to overcome; a buy-back, therefore, is rarely funded this way.

What is involved to effect a share buy back?

There is significant work and time required to effect a buyback of shares; and there are strict procedures that need to be adhered to under the Companies Act 2006. A private limited company will need shareholder approval for the buy-back of shares, usually by way of an ordinary resolution unless the company’s articles of association provide otherwise. Therefore, not only do you need the requisite agreed terms between the parties and funding in place, but to follow due procedure otherwise you are at risk of the transaction being void due to lack of authority and committing an offence for breach of the Companies Act 2006.

Typically, when undertaking a buy-back you will need to do the following:

• Background review of the articles and any shareholders agreement to confirm there are no restrictions on the buy-back and understand company procedure;
• Drafting the share buy back documentation;
• Obtaining shareholder approval; and
• Post-Completion filings with HMRC for stamp duty and Companies House.

Typically, the documents required for a share buyback include:

• A buy back agreement;
• Board meeting minutes to seek members’ approval for share buy back;
• Notice to members of a proposed meeting/resolution required;
• resolution to approve share buy back; and
• Company House filings.

If you repurchase shares out of capital, then you require further documents and a Law Gazette announcement to notify potential creditors.

It is worth noting that there are more stringent regulations which apply to public companies, therefore the procedure and requirements will vary if a public company rather than a private limited company.

Who pays tax on a buy-back?

The purchaser must pay Stamp Duty on the share purchase within 30 days of completion, just as you would with a share transfer.

The seller will also need to consider if they have tax due, either as income, gains or corporation tax depending on the situation. Clearance from HMRC may be required or recommended before effecting the buy-back and you should speak with your accountant or tax-advisor before effecting a buy-back to ensure you are aware of the tax implications of the sale.

Where does the buy-back need to be filed?

Following completion of the buy-back, Companies House will need to be updated. This will include filing an SH03 (once stamped) and SH06 return. Moreover, PSC and director notices may also need to be filed to show any resultant changes in persons of significant control or directors (if resigning as a part of the process). When due, the confirmation statement will also need to be updated to show the buy-back.

In addition to the public records, the Company’s statutory books will also need updating.

When do we need a lawyer?

Using a solicitor to affect your buy-back means that you can ensure the various procedures are complied with, and legal complexities navigated. We work closely with your accountant and tax-advisors to consider the funding, the tax implications and legal procedure and drafting align.

If you would like to know more about how we can support you with your buyback transaction, please don’t hesitate to contact us…