EM Law | Commercial Lawyers in Central London
Share buyback solicitors
A share buyback is the purchase by a company of its own shares. Under the Companies Act 2006, a company may buy back its shares either through an off-market purchase or a market purchase. In general, off-market purchases are available to both private and public limited companies but only certain public companies are able to make market purchases. A buyback that is not carried out in accordance with the Companies Act 2006 is unlawful and the transaction will be void.
Why carry out a share buyback?
There are many reasons for carrying out a share buyback. These include:
- Returning surplus cash to shareholders.
- Increasing earnings per share.
- Increasing net assets per share.
- Enhancing share liquidity.
- Increasing gearing.
- Providing an exit route for shareholders.
Market v off-market purchases
Under the Companies Act 2006, a company’s purchase of its own shares on a recognised investment exchange is a market purchase. A company’s purchase of its own shares which is carried out otherwise than on a recognised investment exchange or on a recognised stock exchange but where the shares are not subject to a marketing arrangement on the exchange is an off-market purchase.
Financing the buyback
A buyback can be funded by any of the following means:
- From distributable profits.
- From the proceeds of a fresh issue of shares.
- Out of capital (only private companies).
A private company may also, if authorised by their company, purchase its own shares out of capital up to an aggregate purchase price, in any financial year, of £15,000 or 5% of its fully paid share capital for that year (whichever is lower). This is called the de minimis exception.
A private company will usually carry out a share buyback through an off-market purchase. Before considering a share buyback, a private company should check its articles of association. The articles must be checked to ensure that they do not restrict or prohibit the company from purchasing its own shares. Where a company’s articles do expressly prohibit or restrict buybacks, it should be possible to amend the articles by special resolution to remove this. A share buyback contract must also be drafted. A company may only make an off-market purchase if a contract is approved before the purchase or where the purchase is the for purposes of or pursuant to an employee share scheme, under a general authority given by the shareholders. The contract should set out the main terms of the buyback including the name of the seller, the number and class of shares being sold, and the price to be paid.
A public company can carry out a share buyback through either an off-market or a market purchase. Before considering a share buyback, a public company should check its articles of association. The articles must be checked to ensure that they do not restrict or prohibit the company from purchasing its own shares. Where a company’s articles do expressly prohibit or restrict buybacks, it should be possible to amend the articles by special resolution to remove this. If you choose to make an off-market purchase, a contract must be approved before the purchase. There is no equivalent provision in the Companies Act 2006 relating to market purchases. For public companies, a sufficient number of shares must also remain in the hands of the public following a share buyback.
A share buyback can be a complex transaction and will differ depending on the type of your company. There are also numerous requirements under the Companies Act 2006 that must be fulfilled.