Share Buybacks

While share buybacks can be an effective and commercially attractive solution, they are governed by strict statutory rules. Failure to comply may render the buyback void.

Is a company permitted to buy back its own shares?

The Companies Act 2006 permits a company to buy back its own shares, but only where specific statutory conditions are satisfied. In broad terms, there are four fundamental requirements:

1. Authority under the articles of association

The company’s articles must permit share buybacks. While most articles of association do allow for buybacks, some older articles restrict or prohibit them. Therefore, the articles should be reviewed beforehand and if needed, amended by the company.

2. Compliance with statutory procedure

• Buybacks must follow the prescribed legal process, including:
• a written buyback contract;
• appropriate shareholder approval;
• board resolutions;
• correct timing and method of payment; and
• Companies House filings within the relevant time periods.

3. Sufficient distributable reserves

A company may only fund a buyback out of profits available for distribution. Cash at bank alone is not sufficient; the company must have adequate distributable reserves.

4. Full Payment on Completion

The consideration for the buyback must be paid in full on completion. Deferred or instalment payments are not permitted.

Key issues for sellers

The purchase price should be unambiguous as upon the shares being bought back and cancelled, the seller has no continuing security. Shares may be bought back in tranches where the selling shareholder sells the shares in stages. Sellers should therefore be clear on precisely how and when payment will be made.

Tax treatment is also a key consideration. A share buyback may qualify for capital gains tax treatment, but only where specific statutory conditions are met. Sellers should always obtain tax advice from an accountant before entering into a buyback agreement.