Overcoming Challenges with a Share Buyback: A Guide for SMEs

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.