A company can return value to its shareholders by buying back some of its shares. This is known as a "share buyback" or a "company purchase of own shares".
A company may decide to buy back its own shares for a number of reasons; however the two most common reasons are to:-
The statutory procedure to be followed depends on whether the proposed buyback is an "off-market" purchase or a "market" purchase. A private limited company carrying out a share buyback will always make an off-market purchase. Market purchases involve shares listed on the open market and are therefore unlikely to be of relevance to private companies.
Part 18 of the Companies Act 2006 (CA 2006) must be complied with when carrying out a share buyback. If a buyback is not carried out in compliance with these provisions, the transaction will be void and an offence will be committed by the company and every officer in default.
There must be at least one non-redeemable share in issue after the buyback. Only fully-paid shares can be bought back.
A private limited company may finance an off-market purchase:
Shares bought back by a company, other than under an employees' share scheme (see further below), must be paid for at the time they are purchased which means that deferring payment or payment by instalments is not possible.
In order to make a share buyback, a company must enter into a contract with the shareholder(s) whose shares are to be purchased. It is usually a simple agreement providing for the company to purchase the shares or it can be a contract under which the company may become entitled or obliged to purchase the shares in the future subject to certain conditions being met. It need not be a stand-alone contract and can be incorporated into the company's articles as standing authority to buy back.
The contract for an off-market share buyback must be approved by the shareholders either before the contract is entered into or the contract must state that no shares will be purchased until its terms have been approved by resolution of the shareholders.
As noted above, shares bought back by a company generally must be paid for in full at the time of purchase. This can present a challenge where a company would seek to stagger the payments (for example, make the buyback more affordable). If a company does not want to pay for all of the buyback shares up front, then the buy back would have to take place in tranches, with payment for each tranche made in full each time and the selling shareholder retaining some of their shares until the final tranche has completed. Although this might make a buyback more affordable for a company, it is important to note that doing so will mean that the selling shareholder will retain the rights attaching to the shares they continue to hold (for example, voting rights or rights to dividends) until such time as their shares are fully bought back.
The requirement to pay for shares in full also means that anti-embarrassment provisions should not form part of any buyback agreement. The payment of any uplift would likely constitute additional consideration, which would render the buyback agreement void as a result. A possible solution to this might be to have some of the selling shareholder's shares purchased by the remaining shareholders at the same time as the rest are bought back, with the remaining shareholders undertaking to pay a proportion of the uplift to the selling shareholder if their shares are sold for a higher value - though it is important to note that such an obligation would fall on those remaining shareholders in their personal capacity (i.e. and not on the company itself).
In 2013 and 2015, the Department for Business Innovation and Skills published new legislation intended to make it easier for companies to buy back shares held by their employees. The main changes were:
While the rules specifically relating to share buybacks have been fairly settled since the 2013 and 2015 regulations, one piece of legislation which may be worth considering when planning a share buyback is the NSIA. This Act provides for greater scrutiny of transactions that change the share ownership of companies which may have national security implications. The government has taken a greater level of interest in the control and share ownership of companies performing one of a number of specified activities, or active in certain business sectors.
The UK government has identified 17 "sensitive" areas of the economy, such as defence, energy and communications. If, following a proposed transaction, a shareholder in a company active in a "sensitive area" will:-
then a notification to the government by that shareholder (but not the company) is legally required prior to the transaction taking place. Only after clearance is granted can the transaction proceed.
It is important therefore to know prior to a share buyback taking place whether a company falls within the scope of the NSIA provisions and whether the proportion of any shareholders' ownership of shares in the company will increase to the point where an NSIA notification becomes necessary.
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