New share buyback scheme

Share buybacks enable a company to purchase its own shares from one or more of its shareholders. This can have several advantages including:

• returning surplus money to shareholders
• increasing liquidity
• allowing for the removal of a dissident shareholder who wishes to sell when the other shareholders cannot afford to buy.

Previously, shareholders had to approve every purchase by special resolution and the payment for the shares had to come out of distributable profits, the proceeds of a fresh issue of shares, or out of capital. The new rules have seen the procedure for private companies to buy back their own shares become simpler, although questions remain over the likely impact of the reforms.

The main change allows companies to buy back a small number of shares without having to work out whether the purchase can be financed out of distributable profits. Although there are limits on the use of this exemption, it should prove to be useful for companies buying from so-called bad leavers. Tied in with this is the change which permits the purchase price to be paid in instalments rather than one lump sum, where the buyback is for an employee share scheme (a significant change from the previous position). The financing provision is still not clear and further clarification is likely to be provided by the Department for Business, Innovation & Skills (BIS).

The need for a special resolution for every share buyback has also been moderated. Now, shareholders can give standing authority for five years for a company to buy back shares within set parameters, as to the minimum and maximum amount payable for the shares. In the absence of a standing authority, purchases may now be approved by an ordinary rather than a special resolution.

Further changes allow private companies to hold purchased shares as treasury shares, a mechanism previously only available to public companies. This means a company will be able to purchase its shares and then make the same shares available to other employees (before the changes, the relevant shares had to be cancelled and could not be re-issued).

One area which has not been reformed is the tax treatment of buybacks. This is particularly relevant when shares are purchased by the company for more than their original subscription price. BIS may need to look into this issue if they are to succeed in making buybacks an even more commonplace feature of the corporate landscape.

Chris Wills is a partner in our Legal 500-rated corporate & commercial department. He has over a decade of experience in advising businesses on a range of transactions and issues, including mergers and acquisitions, debt and equity funding, joint ventures and shareholders’ agreements, partnership and LLP agreements, group restructures and commercial collaborations. Chris advises businesses across a broad range of sectors, from start-ups and family businesses to established companies operating on a global scale. Contact Chris for advice on this topic.