Considering a Share Buyback…
Why do companies buy their shares back? Well, one reason is that it provides a way for shareholders to dispose of their interests in a company for example if they pass away or want to retire. If a new shareholder cannot be found or the other shareholders do not want to buy the shares or if a person inheriting shares does not want them, then a buy back is a good option.
Public limited company’s often use share buybacks as they claim it is a more tax efficient way of returning surplus money to shareholders. Often companies do this to boost the value of their share price because the fewer shares there are on the market available for purchase, the higher the price will be when they become more scarcely available. Whatever the reason, it allows a company to take back a portion of shares held by existing shareholders.
A share buyback can be carried out on or off market. Public companies usually carry out market buybacks through a stock exchange. This article only focuses on the methods available to private limited companies. There are three ways to complete a share buyback for a private limited company;
- Purchase of own shares – when a private company purchases its own shares, the shares will either be cancelled immediately or held in treasury provided they have been purchased using distributable profits.
- Share redemption – share redemptions only apply to redeemable shares but the company must have another share class that is irredeemable in order to carry out the buyback by redemption, otherwise the company could be left with no shareholders!
- Share capital reduction – a share capital reduction can occur by various methods such as by cancelling shares, repaying share capital, reducing the nominal value of the share class, or reducing the number of unpaid shares.
Here are a few general things to consider when preparing. You will need to check whether the articles prohibit any of the above mentioned methods, if so a special resolution may be required to get around the articles. Also check that the shares being purchased are fully paid and ensure that at least one non-redeemable share remains in issue.
If you are planning a redemption, you will also need to review any shareholder agreements in place as well as the articles for any terms. The terms of a redemption usually include information about how to determine the redemption date and price or there might be a pre-determined date and instructions for how to calculate the price.
If you are planning a capital reduction remember that you will need to sign a solvency statement in support of the reduction. It is advisable that you seek financial guidance before commencing a buyback.
More generally, you will need to consider the process and what is required of you in terms of documentation and procedure before, during and after. Think about how the buyback will be funded and what the consequences will be when it has been completed. Conduct a review of the company’s financial status, current operations and future projections.
Remember than any share certificates for shares that have been bought back will need to be cancelled, your company’s register of members will need to be updated and you may need to issue a balance certificate if a shareholder has only sold a portion of their shares back to the company rather than all of them. Your accounting records will also need to be updated to reflect the changes you have made.
M & N can produce tailored board minutes and shareholder resolutions for a purchase of own shares, reduction of share capital and share redemption and we can talk you through the correct procedure. We also provide directors’ solvency and compliance statements and can complete and submit the relevant forms to Companies House. Please contact us so we can guide you through the process with minimum confusion and complete professionalism.