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Changes to the share buy back rules
This note details the key changes to the share buy back rules, as set out in the Companies Act 2006. The changes, which were implemented by the Share Buyback Regulations came into effect on 30 April 2013.
When carrying out due diligence for an acquirer of a company the words “buy back” tend to ring alarm bells. The rules regulating buy backs are very prescriptive and any deficiencies cannot be rectified retrospectively. All too often, when undertaking due diligence, deficiencies in a past buy back are identified and can cause significant delays to a deal’s timetable.
The repercussions of an apparently minor administrative error are severe – the buy back is void. This means that the target company has more shares in issue than previously thought and the invalid buy back has to be repeated before the present acquisition takes place. Repeating a buy back can be challenging, not just because the target company’s financial position may have changed in the meantime, but because the party to the buy back (who already holds the buy back proceeds) may often not be in such a rush to repeat the process as quickly as the parties to the present transaction would like.
We advised the vendors on a transaction last year where there was a deficient buy back and the former shareholder had moved to the Southern hemisphere. Fortunately the former shareholder still had a good relationship with the management of the target company and was therefore helpful but, in other circumstances, the implications for the transaction could have been considerable.
The key changes introduced by the Share Buy Regulations are to facilitate the issue of shares to employees under the new employee share schemes described here and simplify the process if such shares have to be bought back, and are as follows:
|Previous position||New position|
Private companies were prohibited from holding treasury shares. Public companies have always been able to hold treasury shares.
Private companies are now permitted to hold treasury shares. Whilst any shares can be brought into treasury, the key intended use is so that a company which has issued shares to employees can buy those shares back if the employee leaves and re-issue the shares (or grant an option over the shares) to another employee.
It should be noted that changes to the company’s articles and option plans/agreements may be required to ensure that the change permitted by legislation is also in accordance with the company’s constitution and contractual obligations.
This change should mean that some companies which would have set up an employee benefit trust in the past may be able to avoid the cost and administrative burden of doing so in the future.
A special shareholder resolution (either by way of a general meeting or a written resolution) was required to authorise a private company’s directors to buy back specific shares. A lack of shareholder resolution is one of the most common reasons for a buy back being invalid.
Subject to any higher threshold in a company’s articles, only an ordinary resolution will now be required to authorise buy backs.
Directors may now seek a general buy back authority from a private company’s shareholders for the purposes of issuing shares pursuant to an employee share scheme, bringing private companies somewhat in line with public companies. This enables the directors to quickly buy back a departing employee’s shares without the previous administrative burden.
Companies must buy back shares using distributable profits. There is a provision for private companies to buy back out of capital but it is administratively onerous.
There is a new exception allowing companies to buy back the lower of i) £15,000 and ii) 5% of a company’s share capital value in any financial year regardless off whether or not the company has distributable profits.
The administrative burden (and expense) of a buy back out of capital has been reduced by removing the need for an auditor’s report when buying back in connection with an employee share scheme. Note that a payment out of capital still requires a shareholders’ special resolution and a directors’ statement of solvency.
Buy back shares had to be purchased for cash at the time of the buy back.
Payment by instalments will be permitted when buying shares that form part of an employee share scheme. The purpose of this is to relieve a company’s cashflow burden.
 The Companies Act 2006 (Amendment of Part 18) Regulations 2013 (SI 2013/999)
For further information, please contact James Wilkinson - Corporate Associate.