What is a Share Buyback in England?

If you own a company or are a company director, you may want to initiate a share buyback. Notably, a company cannot simply buy back outstanding shares when it wants to. Instead, you must meet certain conditions and follow specific processes. This article will provide an overview of how a company can purchase its own shares. 

Redeeming Shares vs Share Buyback

It is essential to distinguish between a company:

• redeeming allotted redemption shares; and 
• purchasing its own shares. 

A company issues redemption shares with the express intention of redeeming them from the shareholder in exchange for some form of consideration (usually cash). These are distinct from non-redeemable shares, the most common of which are ordinary shares. The laws that govern redemptions and share purchases likewise differ. 

The law has broad restrictions on the ability of a company to reduce its share capital in what is known as the doctrine of share capital maintenance. This doctrine exists to protect your company’s creditors. The effect is that creditors can look at a company’s balance sheet and work out the minimum value of assets the company must keep on hand to pay its debts. 

Purpose of a Share Purchase 

For a private company, there is no readily available market of buyers ready to purchase ordinary shares, making it harder for shareholders to exit their investment in the company. Unlike redemption shares, there is no right attached to the shares that allow the shareholder to redeem them for cash. This is one reason why a company is permitted to purchase its own shares from a shareholder. 

Other reasons include:

• increasing the size of the pool from which a company can issue dividends; 
• rebalancing the company’s balance sheet to more accurately reflect the true price of its assets if the company’s assets have substantially lost their value; and 
• increasing the value of the individual shares following the buyback (though in practice, this is more relevant for public companies). 

Process for Share Buybacks 

A company has three different ways it can buy back its own shares:

• using its profits; 
• using the proceeds of a recent share allotment; and 
• using a special legal procedure known as the De Minimis provisions.

Using Profits and the Proceeds of a Recent Allotment 

If your company wishes to initiate a share buyback, consider whether either of the following applies:

• your company has remaining profits; or 
• your company has cash on hand from a recent share allotment. 

If either is true, you must use these funds before your company can dip into its own share capital.

However, you must first meet the following conditions:

• the company’s articles have not restricted its ability to initiate a buyback; 
• all of the shares the company proposes to issue are fully paid up; and 
• the company will have a sufficient value of remaining share capital following the share purchase.

Process 

If your company meets the above conditions, the next step involves:

• seeking shareholder approval through an ordinary resolution (or, if specified in the articles, a special resolution); and
• passing a resolution that specifies the exact terms of buyback.  

Finally, company directors must file certain documents with Companies House within 15 days of the buyback. 

The De Minimis Procedure 

The De Minimis procedure provides a narrow set of conditions for a company to purchase its own shares from its share capital. The value of the shares that can be purchased in a single financial year cannot exceed the value of:

• £15,000; or
• 5% of the company’s share capital, whichever is lower.

Before the company can initiate a De Minimis procedure for buying back its own shares, you must first meet the following conditions:

• the company’s articles must not restrict its ability to initiate a buyback; 
• it must use any profits or proceeds from a recent share allotment first; and 
• the accounts used to verify the profits must have been prepared no more than three months before the date of the directors’ solvency statement. 

There are other accounting requirements the law imposes on directors to verify. Therefore, companies should instruct a financial adviser before proceeding with a share buyback under the De Minimis provision. 

Process 

After fulfilling the above conditions, directors must prepare certain documents before a company can redeem shares. These include:

• a statement of solvency, which is where the directors attest to the fact that the company can pay its debts for the next 12 months; 
• an auditors report, which an independent auditor prepares; and 
• a shareholder resolution passed by a special resolution within a week after the directors sign the statement of solvency. 

Further, your company’s shareholders and directors will have to undertake additional steps before the shares can be redeemed with the company’s share capital. A further account is beyond the scope of this article. 

Key Takeaways 

A company may initiate the purchase of its own shares through three different routes: 

1. using the company’s profits;
2. using proceeds from a share allotment; and 
3. through a specific legal mechanism known as the De Minimis procedure. 

The first two routes require a broadly similar set of conditions to be in place. The third route is more onerous and restricts the total value of shares the company can purchase. In all cases, the company’s directors must undertake formal steps to comply with the law, such as instructing an accountant and a legal adviser. 

If you need help initiating a share buyback, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Visit our membership page or call us on 0808 196 8584.

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