As we have seen in our previous article “Selling my half of a Ltd company” there are various routes shareholders can use to sell their shares in a private limited company. One possible option referred to in that article was the option for the company to buy your shares.
Share buybacks can be used by a company for various reasons including the return of surplus cash to shareholders, increase net assets and of course as an exit route for shareholders.
Here we consider the buyback route in more detail.
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Check the company’s articles
Under the Companies Act 2006 (CA 2006), there is no requirement for a company’s articles to include a specific authority for the company to be able to purchase its own shares (and this applies to all companies, not just those formed under the CA 2006). Nevertheless, the company’s articles must be checked to ensure that they do not restrict or prohibit the company from purchasing its own shares.
Where a company’s articles expressly restrict or prohibit buybacks, it should be possible to amend the articles by special resolution (approved by 75% of shareholders) to remove the restriction or prohibition. It is possible, however, that the relevant article is entrenched. If so, it may be necessary to obtain the approval of a majority of shareholders greater than the majority required to pass a special resolution.
In addition, even though a private company is no longer restricted from giving financial assistance for the acquisition of its shares, its articles may include a prohibition on the giving of financial assistance. This could potentially impact on its ability to lawfully purchase its own shares. As a result, it would be advisable to remove any prohibition on the giving of financial assistance contained in a company’s articles before it carries out a share buyback.
Share buybacks are strictly regulated by Part 18 of the CA 2006 and a failure to comply with its requirements will not only render the buyback void but could result in the company committing a criminal offence and its officers in default, with serious consequences for both. However, a company buyback of shares is a perfectly legitimate method of extracting cash from a private company. Company buybacks are a route for shareholders (including shareholders who are directors or employees) to realise value for their shares.
The essential points to note.
The company uses its post-tax distributable profits to pay for the purchase of its own shares. If the company does not have the cash available to pay for the shares the company cannot buyback the shares.
The company cancels the shares bought back. This means that all remaining shareholders gain an increased share entitlement as there are fewer shares in issue.
Consequences of Buyback
The share buyback will attract a stamp duty payment of 0.5% of the purchase price payable by the company
The shares bought back are cancelled;
A copy of the buyback contract must be kept at the company’s registered office for a period of 10 years following the buyback.
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We have a proven track record of dealing with business sales. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
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