In late 2018, Corporate and Commercial Associate Wayne Spolander wrote an article about selling shares back to the company. Since then, the article has become a popular guide for both buyers and sellers; leading to many instructions. In this Q&A, Wayne answers your questions.

Why would a company want to buyback its own shares?

The reasons for a company undertaking a share buyback are usually one or more of the following:

• Return of surplus cash to shareholders
• Increase earnings per share
• Increase net assets per share
• Enhance share liquidity
• Increase gearing
• Provide an exit route for shareholders

How important is compliance with the Companies Act?

A limited company may only acquire its own shares if the transaction is in accordance with the Companies Act. If a company undertakes a buyback and is not compliant with the Act, the purchase is unlawful and the transaction is void.

Failure to comply is an offence committed by the company and every officer is in default. An officer in default is liable to a prison term of up to two years or an unlimited fine, or both.

What are the restrictions on a share buyback?

Generally a company can purchase its own shares if its articles of association or any shareholders agreements do not prohibit it from doing so. However be aware of the following:

• The Companies Act states that a company may give financial assistance for the acquisition of its own shares. Therefore, any prohibition of this within the company’s constitution is to be removed
• If the company owns multiple classes of shares, consider whether buyback could vary the rights attached to those classes – in which case, class consent to vary would be required
• Is there any banking facility which might restrict the company’s ability to undertake a buyback?
• There must be at least one non-redeemable share in issue after the buyback

How do you determine a price?

The price is determined by the directors who may find they have to comply with terms in the company’s articles of association or a shareholders agreement governing valuation of shares on a buyback.

How is a share buyback financed?

A private company may purchase its own shares:

• out of profits available for distribution; or
• out of the proceeds of a fresh issue of shares made for the purpose of such financing – the new issue must be made to fund the buyback. It is recommended that the buyback is made at the latest within a few months following the issue of the new shares; or
• by making a payment out of capital. Payments out of capital are subject to any restriction or prohibition in the company’s articles; and
• with cash up to an amount in a financial year not exceeding the lower of £15,000 or the value of 5% of its share capital.

The general rule is that shares must be paid for in full at the time of completion of the buyback.

A specialist Corporate & Commercial Associate’s advice

As an Associate Solicitor, Wayne Spolander, deals with Corporate Transactions as well as Commercial contracts.

He says: “Although transferring shares is a relatively simple process, the background often involves many complex issues. In addition, there are many other practical adjustments to think about alongside the legal implications.

“These transactions usually take place for considerable amounts of money, often with tight deadlines. It is wise to take advice from a specialist, experienced lawyer who can guide you through the transaction and ensure nothing vital is missed.”

To find out more about the share buyback process, click here to read the original article.

Alternatively, you can get in touch with one of our expert Corporate & Commercial solicitors here.

Specialist Corporate and Commercial solicitors in Bournemouth, Christchurch and Ringwood

Our Corporate and Commercial Teams are happy to discuss any issues that this raises for you. We offer all new clients a free initial chat with one of our bright, friendly lawyers over the phone or by video call.

If you have any questions please call 01202 499255 and Wayne or a member of the team will be happy to chat about your situation and your particular requirements.