Company & Commercial

Overcoming Challenges with a Share Buyback: A Guide for SMEs

For many small and medium-sized enterprises (SMEs), a share buyback can be an effective way to manage ownership structure, return capital to shareholders, or resolve shareholder disputes.

29 Sep 2025

Team name
James Bowles

James Bowles

However, navigating the legal and procedural requirements of a share buyback under English company law is far from straightforward—especially for private companies without in-house legal teams.

In this article, we explore the common challenges SMEs face during a share buyback and offer practical guidance on how to overcome them.

Why Consider a Share Buyback?

A share buyback involves a company purchasing its own shares from existing shareholders. SMEs typically consider buybacks for a range of reasons, such as:

  • Facilitating the exit of a founding shareholder
  • Resolving disputes or deadlock situations
  • Managing dilution after an employee share scheme
  • Optimising capital structure or using surplus cash

Despite its advantages, executing a buyback carries several legal and procedural hurdles.

Common Challenges – and How to Overcome Them

1. Authority to Buy Back Shares

The Issue: A company must have express authority in its articles of association to carry out a buyback. Many older articles (especially for legacy SMEs) don’t contain this authority.

Suggestion: Review the articles early in the process. If authority is lacking, the articles will need to be amended by special resolution (75% shareholder approval). Ensure this is factored into the transaction timeline.

2. Using Permissible Capital

The Issue: Under the Companies Act 2006, a company can only buy back shares out of distributable profits or the proceeds of a fresh share issue made for the purpose of financing the buyback. SMEs may not always have sufficient reserves.

Suggestion: Consider whether a new issue of shares to fund the buyback is viable. Alternatively, if cash flow is tight, an off-market buyback in tranches (provided it is properly structured) may help ease the burden.

3. Complying with Procedure

The Issue: Buybacks must comply with strict statutory procedures. For private companies, an off-market buyback requires:

  • A buyback contract approved in advance by ordinary resolution
  • Signature of the contract before the shares are repurchased
  • Purchase price must be paid in cash on completion
  • Filing of relevant forms at Companies House (e.g. SH03, SH06)

Failure to comply can render the buyback void, with potential director liability.

Suggestion: Seek legal advice early and use a clear checklist. Draft the buyback agreement with care, ensuring shareholder approvals are correctly documented. A common pitfall is signing the contract and executing the buyback in the wrong order—timing is critical.

4. Avoiding Employment Law Pitfalls

The Issue: Where shares are held by current or former employees, buybacks can inadvertently trigger employment law issues—especially where the buyback forms part of a wider exit or settlement.

Suggestion: Coordinate the buyback with any employment termination agreements. It’s essential to ensure tax-efficient structuring and avoid breaches of settlement terms or waiver clauses.

M&P Commentary

James Bowles, an Associate in the Corporate and Commercial team at Mullis & Peake, highlighted the following key takeaways:

  • Plan early: Review articles of association and financials as soon as a buyback is contemplated.
  • Structure carefully: Ensure the company is using lawful capital and following proper process.
  • Get advice: A poorly executed buyback can be void. Legal and tax advice can save time, cost, and risk.

At Mullis & Peake LLP we regularly support SMEs through the buyback process—whether you’re planning an exit, resolving a shareholder dispute, or reorganising your business structure. If you’re considering a share buyback, get in touch with our corporate team for practical, tailored advice.

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