{"id":176500,"date":"2022-10-10T02:28:54","date_gmt":"2022-10-10T01:28:54","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=176500"},"modified":"2025-07-02T00:38:49","modified_gmt":"2025-07-01T23:38:49","slug":"purchasing-companys-shares","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/corporations\/purchasing-companys-shares\/","title":{"rendered":"What Effect Does Purchasing My Company’s Shares Have in England?"},"content":{"rendered":"\n

If your company is thinking about purchasing its own shares \u2014 also called a share buyback<\/a> \u2014 you might wonder what effect share buybacks will have on your company\u2019s accounts. By purchasing your company’s shares, you effectively lower its share capital’s value while reducing the value of its assets. This is because there is a connection between the number of shares<\/a> a company has outstanding, the value of the company\u2019s assets, and what lawyers call the doctrine of share capital maintenance. <\/p>\n\n\n\n

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You may find it easiest to make sense of this effect by referring to the impact the share purchase has on your balance sheet<\/p>\n<\/div>\n\n\n\n

This article will explain the effect of purchasing your company’s shares, such as on your company’s share capital, and provide a brief overview of some essential legal concepts. <\/p>\n\n\n\n

Share Capital <\/span><\/h2>\n\n\n\n

A company\u2019s <\/span>share capital<\/span><\/a> refers to the number of <\/span>outstanding shares<\/span><\/a> a company has issued to its shareholders and their value. <\/span><\/p>\n\n\n\n

The value of your company\u2019s share capital is equal to the net asset value (NAV) of your company adjusted for its profit and losses and other accounting treatments. NAV is calculated as the total value of all your company\u2019s assets, less all outstanding liabilities. By accounting for any profits or losses incurred in the accounting period, you derive the value of your company\u2019s share capital.<\/span><\/p>\n\n\n\n

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In some cases, your company may have to adjust its equity figure based on certain other factors.<\/p>\n<\/div>\n\n\n\n

Importance of Share Capital <\/span><\/h3>\n\n\n\n

The law restricts your company\u2019s ability to alter its share capital. For example, corporate law prevents you from paying shareholders cash that does not arise from your company\u2019s profits. This is because the value of the share capital is the value of the assets your company\u2019s creditors can claim against you should your company face financial difficulties. <\/span><\/p>\n\n\n\n

Additionally, the law requires your <\/span>company to file its financial accounts<\/span><\/a> each year. The information you supply allows creditors to inspect your account and determine:<\/span><\/p>\n\n\n\n

  1. the current value of your company\u2019s share capital; and <\/span><\/li>
  2. how much the value has changed from year to year. <\/span><\/li><\/ol>\n\n\n\n

    In other words, by restricting the ability of your company to alter its share capital value, the law provides creditors with a degree of comfort that there is a reserve pool they can draw from if necessary. <\/span><\/p>\n\n\n\n

    The restrictions the law imposes on your company exist to preserve its share capital. This is called the doctrine of share capital maintenance.<\/span><\/p>\n\n\n\n

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    Effect of Share Purchases on Share Capital<\/span><\/h2>\n\n\n\n

    The legal process a company must follow to purchase its own shares is an exception to the doctrine of share capital maintenance. This is because:<\/span><\/p>\n\n\n\n

    1. Your company uses its own valuable assets (usually cash) to pay its shareholders in exchange for purchasing shares in itself.<\/span><\/li>
    2. This results in the company having fewer outstanding shares and fewer assets.<\/span><\/li><\/ol>\n\n\n\n

      The effect is that the value of the share capital is now less. From the perspective of your company\u2019s creditors, the reserve pool they can draw on if your company cannot pay its debts is now smaller. This appears to contradict the doctrine of share capital maintenance.<\/span><\/p>\n\n\n\n

      Therefore, the law only allows your company to purchase its own shares under limited circumstances and through three routes, namely:<\/span><\/p>\n\n\n\n

      1. its profits;\u00a0<\/span><\/li>
      2. cash raised from a recent share allotment; or\u00a0<\/span><\/li>
      3. using its own capital reserves in what is called the <\/span>De Minimis <\/span><\/i>procedure.\u00a0<\/span><\/li><\/ol>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n
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