Introduction / Off-Market or On-Market / Financing Options / Premium Payable on Shares / Payments Other Than the Purchase Price / Price of Shares and Timing of Payment / Procedure for Carrying Out a Share Buyback / Share Buyback Approvals Required / Conclusion
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Private company share buybacks can be a complex process, governed by the Companies Act 2006. In this blog post, we will provide a detailed overview of the key considerations and financing options involved in a private company share buyback.
Off-Market or On-Market: For private limited companies, only off-market share buybacks are allowed. This means that shares can only be repurchased directly from shareholders, rather than through a market transaction.
Out of Distributable Profits: A private limited company can finance a share buyback using its distributable profits.
Distributable profits are the accumulated, realised profits of the company, minus any accumulated, realised losses. These profits must be legally available for distribution.
Proceeds of a Fresh Issue of Shares: Another financing option is to use the proceeds from a fresh issue of shares made specifically for the purpose of financing the share buyback. It is important to document the reason for the share issue and update the company's register of members accordingly.
Out of Capital: Under certain circumstances and subject to the company's articles of association, a private limited company can finance a share buyback out of its capital. This requires a prescribed procedure, including a solvency statement, shareholder approval, and publication of a notice in the Gazette.
Combination of Financing Options: A company may choose to use a combination of financing options, depending on its financial position and the specific requirements of the share buyback.
The options available to a company to finance the purchase price of shares that it wishes to buy back will depend on its financial position.
If more than one financing option is available to a company, it would be sensible to consider the effect of each option on the company's accounts after the buyback before making a choice. One or more financing options may be considered for use together.
Premium Payable on Shares: If a premium is payable on the shares to be bought back, it must generally be paid out of distributable profits. However, if the shares were originally issued at a premium, the premium payable on the buyback can be financed using the proceeds of a fresh issue of shares, up to the aggregate amount of the premiums received when the shares were originally issued.
Payments Other Than the Purchase Price: Any payments made in consideration of contingent share purchase contracts, variations of contracts, or the release of obligations related to the share buyback, must be financed using distributable profits.
Price of Shares and Timing of Payment: The price to be paid for the shares to be bought back must be disclosed to shareholders, and the terms of the share buyback contract must be approved by shareholder resolution. There are no maximum or minimum price limits for off-market share buybacks. The timing and manner of payment must comply with the requirements of the Companies Act 2006.
Procedure for Carrying Out a Share Buyback: The Companies Act 2006 sets out the procedure that a private limited company must follow to carry out an off-market share buyback. This includes obtaining shareholder approval, making the necessary payments, and updating the company's records.
Share Buyback Approvals Required: To approve a share buyback, the directors of a private limited company must follow certain steps and fulfil specific requirements. Here is an outline of the process:
Review the Company's Articles of Association: The directors should review the company's articles of association to ensure that they have the authority to approve a share buyback. The articles may contain provisions regarding the directors' powers and any limitations or restrictions on share buybacks.
Consider the Financial Position: The directors should assess the company's financial position and determine whether it has sufficient funds or assets to finance the share buyback. They should also consider the impact of the buyback on the company's financial stability and ability to meet its obligations.
Prepare a Solvency Statement: If the share buyback is to be financed out of capital, the directors must prepare a solvency statement. This statement confirms that, based on their reasonable expectations, the company will be able to pay its debts as they fall due for a period of at least 12 months following the buyback. The solvency statement must be supported by a report from the company's auditor.
Obtain Shareholders’ Approval: The directors must seek approval from the shareholders of the company for the share buyback. This approval is typically obtained through a special resolution, which requires the support of a specified majority of shareholders. The resolution should include details such as the maximum and minimum prices for the shares to be bought back.
Publish a Notice: Following shareholder approval, the company must publish a notice of the proposed share buyback in the Gazette. This notice provides public notification of the buyback and allows interested parties to raise any objections or concerns.
Maintain Records: The directors should ensure that accurate records are maintained throughout the share buyback process. This includes documenting the decisions made, resolutions passed, and any relevant financial information.
It is important to note that the specific requirements and procedures for approving a share buyback may vary depending on the company's articles of association and the provisions of the Companies Act 2006.
It is advisable to seek professional advice and refer to the relevant legal provisions to ensure compliance with all necessary steps and obligations.
Conclusion: Private company share buybacks require careful consideration of the financing options available and compliance with the Companies Act 2006. By understanding the legal framework and following the prescribed procedures, companies can successfully navigate the process of buying back their own shares.
See also the following related articles:
Private company share buybacks- what you need to know
Reduction of capital and share buybacks
Reduction of share capital- reasons & procedure
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