Share Buybacks for a private company limited by shares
A share buyback is where a company buys back shares from its shareholders. The company’s own funds are used. The alternative is that a shareholder would have to use their own personal resources. Not many people are fortunate enough to have sufficient spare funds to buy shares. If they needed to extract extra funds from the company to be able to meet the purchase price, they would have to account for tax on their income or dividends attaching to the extra funds.
For a buyback of shares, there are strict rules and tests to follow. If the rules are followed, the money the selling shareholder receives, will be treated as a capital. If the rules are not followed, the money from the buyback will be taxed the same way as a dividend. There is clearly a large difference between the two. The main reasons for a buyback are to return value to the shareholders or to provide an exit to shareholders.
We would always advise clearance is sought from HMRC before completing a buyback.
The Rules
The following requirements must be met, otherwise the buyback will be void:
- Shareholder approval must be obtained (75% or more).
- The shares bought at that time must be paid for in full in cash, the payments cannot be paid by deferred payment/s. It is possible to complete in multiple tranches. We can advise you on different options. For the purpose of this note, we are just focusing on a classic buyback.
- The purchase must be paid from either distributable profits, a fresh issue of shares, or capital.
- Once bought back the shares are cancelled. A company cannot own shares in itself.
- Stamp duty is payable by the company at 0.5% of the value of the shares.
- The company’s articles must not prohibit a buyback.
Seller Requirement Tests
As well as the rules above, the Seller of the shares must satisfy various tests to qualify for capital treatment, relating to:
- Residence and minimum period of ownership of shares. (This is usually 5 years or 3 years if the shares acquired under a will. There are different rules relating to bonus shares.)
- There being a substantial reduction in share capital.
- There being a substantial reduction in share of profits.
- They sever connection to the Company after the buyback.
If there is a shareholder agreement, this will need to be reviewed ahead of the drafting.
We can help with share buybacks
If a buyback is of interest to you, please get in touch and we can see whether this is an appropriate way to achieve what you want. If the rules and tests can be satisfied, they are a very efficient way of returning value to shareholders.
For more details on how we can support you or your business, contact our Corporate and Commercial Law team today.
Client Case Study
Selling a company after 38 years
and why we chose HSR Law.
Client Case Study
The share-sale of a company
to an American buyer.
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