Share buyback

Share buybacks provide companies with a flexible mechanism to return surplus capital to shareholders, manage share capital structure, or facilitate exit arrangements. However, strict legal requirements under the Companies Act 2006 must be followed to ensure validity and protect director interests.

Our more detailed guide to share buybacks including rules, funding and what to include in the share buyback agreement is here.

How we can help

By leveraging our expertise, we can help you save time and money and achieve your business objectives.

Whether you're a shareholder considering selling your shares or a company looking to repurchase shares, our team can assist you with:

• Structuring the deal - advising on the most suitable share buyback structure, including share redemptions, share purchases, and employee share buybacks.

• Drafting and reviewing documents - such as shareholder agreements, board resolutions, and share buyback agreement.

• Tax implications - working with your tax advisors we Identify and mitigate potential tax implications (capital gains tax, income tax, and stamp duty land tax) for both the company and the shareholders.

• Regulatory compliance

Basic requirements for repurchase of shares

• Companies Act - buyback must comply with Part 18 of the Companies Act 2006

• Funding - Company must have sufficient distributable profits or use capital

• Corporate matters - company articles must not prohibit buybacks, a special resolution (75%) to approve is needed unless private company buying under 'small buyback' exemption and a directors' solvency statement is required.

• Payment - shares must be fully paid and payment for the repurchased shares must be made on completion.

• Advance HMRC clearance - not strictly required but advisable.

• Shareholder approval - a private company must obtain approval from its shareholders before it can repurchase its own shares. This is typically done by a special resolution.

• Capital maintenance - a private company must ensure that its capital is sufficient after a share buyback, so net assets should not be less than share capital.

• Tax implications - to qualify for tax benefits the selling shareholder needs to have owned the shares for at least 5 years, there needs to be a plausible business reason for the buyback and HMRC must be satisfied the buyback is not primarily to avoid tax.

Key considerations and pitfalls

• Effect on company's capital structure - consider impact on debt/equity ratio and future financing options

• Impact on remaining shareholders - changes to voting rights, dividend expectations and overall shareholding percentages

• Tax implications for company and selling shareholders - different tax treatment applies to company purchase versus third party sale, affecting both parties' tax position

• Cash flow requirements and timing - company must have sufficient liquid funds while maintaining working capital needs

• Legal Compliance - strict statutory requirements must be followed for valid buyback including correct procedures and timing

• Proper authorisation procedures - multiple layers of approval needed including shareholder resolutions and board decisions

• Valuation methodology - agreed basis for share valuation must be clear and justifiable, especially with minority shareholders

• Payment timing and structure - can be immediate or deferred, but terms must be approved by shareholders

• Treatment of employee shareholders

• Inadequate documentation - full paper trail essential including resolutions, solvency statements and statutory filings

• Tax structure issues

Please do call or email to discuss how we can help you or to find out more about us.