Cancelling shares in your company - why and how to do it?

Why do companies cancel shares?

A private company in the UK may have several reasons to cancel its shares. Some common reasons include:

• Reduce share capital and simplify shareholder structure - reducing the number of shareholders or share classes can simplify the company's structure and decision-making processes.

• Returning capital to shareholders - cancelling shares can be a way to return excess capital to shareholders, especially if the company has accumulated significant reserves.

• Facilitating mergers or acquisitions - cancelling shares can be part of a larger corporate restructuring, such as a merger or acquisition.

• Resolving shareholder disputes - buying out disgruntled shareholders by cancelling their shares can resolve disputes and maintain harmony among the remaining shareholders.

Ways to Cancel Shares

There are 3 main methods to cancel shares in the UK:

• Share buyback - the company purchases its own shares from existing shareholders, which are then cancelled. This method requires the company to have sufficient distributable reserves or to raise new capital.

• Capital reduction - the company formally reduces its share capital by cancelling existing shares. This process involves specific legal procedures, including obtaining shareholder approval and filing necessary documents with Companies House.

• Gift of shares to the company - shareholders can gift their shares back to the company. This method is simpler than a buyback or reduction of capital, but it doesn't involve a direct return of capital to the shareholders.

Legal steps and work involved

The specific legal steps and work involved will depend on the chosen method of cancellation. However, generally, the process may involve:

• Board resolution - the company's board of directors must pass a resolution authorizing the share cancellation.

• Shareholder approval - in most cases, shareholder approval is required, typically through a special resolution.

• Solvency statement - the directors must prepare a solvency statement confirming that the company will be able to pay its debts.

• Filing with Companies House - the company must file the necessary forms with Companies House to register the share cancellation.

• Amending articles of association - the company's articles of association may need to be amended to reflect the share cancellation.

Alternatives

• Share transfer - instead of cancellation, the company can transfer shares to a new shareholder.

• Share consolidation= the company can consolidate its shares, reducing the number of shares but maintaining the overall value.

We can help - contact us

Given the complexities of share cancellation, our experience will ensure compliance with UK company law and tailor the process and commercial considerations to the specific needs of your company.