What is a share buyback?
A share buyback involves a company buying back its own shares from an existing shareholder. Upon the completion of a buyback, a private limited company will typically immediately cancel the shares.
A company may wish to buyback its own shares for a number of reasons, including:
to buy out an existing shareholder (eg who wishes to retire, sell their interest in the company or is deceased), where no other purchases could be found, or the remaining shareholders are unable to buy the shares or do not wish for another party to own the shares
to return excess funds, which are not needed for the company’s ongoing operations, to the shareholders
to take advantage of an undervaluation of the shares
to increase the value of the remaining shares
The share buyback process
The share buyback process is set out in the Companies Act 2006.
When considering a share buyback, the company’s directors need to ensure that the following conditions are complied with:
the Articles of association do not prohibit a share buyback (note that existing articles of association may be amended by special resolution, where at least 75% of all shareholders agree to the amendment)
the company has at least one non-redeemable share in issue. Redeemable shares are those issued on terms that the company will, or may, buy them back at some future date, while non-redeemable shares are shares not issued on such terms
the shares being bought back must be fully paid, and
the shares being bought back must typically be paid for by the company (unless they are being bought as part of an employee share scheme)
The company directors will then need to consider:
the terms of the purchase agreement (including purchasing price), which are typically set out in a share buyback agreement
how the buyback is to be financed (especially where the buyback is made out of company capital, as special rules apply)
how to obtain the necessary shareholder approval
Financing a share buyback
While the purchase price of shares which are being bought back by a company must be paid in cash, a company can fund the purchase in a number of ways. A combination of the below can be used, however, companies must always use any distributable profits and the proceeds of any new issue before making a payment out of capital.
1. Distributable profits
The company can buy back shares using its distributable profits. Distributable profits are the profits of a company that are legally available for distribution, and most commonly take the form of dividends.
2. Issue of new shares
The company can buy back shares using the proceeds of the fresh issue of shares made for the purpose of financing the buyback.
While the law does not specify a maximum time period between the issuing of the new shares and effecting the buyback, it is advisable for the buyback to be within a few months after the issuance of the shares, so that the relationship between the share issue and their purchase is clear.
The company should also ensure that the new shareholders are recorded on the register of company members before the proceeds of the share issuance are used to complete the buyback.
For more information, read Share transfers and issuing new shares.
The company may buy back its own shares from capital subject to any restrictions or prohibitions contained in its articles of association. ‘Capital’ generally refers to any financial resources or assets owned by a company, used in furthering company development and generating income.
Small buyback of shares
Where a company is authorised to do so by its articles of association, it may also make a small purchase of its own shares out of capital up to an aggregate purchase price (in one financial year) of the lower of:
5% of the aggregate nominal value of its fully paid share capital as at the beginning of the financial year
A small buyback of shares allows a company (that may or may not have sufficient distributable profits) to buy back small amounts of shares out of capital without having to follow the more stringent procedure typically required when buying back shares out of capital.
Share buyback procedure
Where shares are being bought back by a company, a prescribed procedure must be followed. The exact procedure depends on how the buyback is being financed, however, it generally includes:
a board meeting proposing the share buyback
obtaining shareholder approval for the buyback
informing the relevant parties (eg company directors and auditors) of the proposed buyback
executing the share buyback agreement
Where a share buyback is made out of capital, a more stringent prescribed procedure must be followed as a buyback out of capital is potentially prejudicial to the interests of the company's creditors. This includes (amongst other requirements):
the company directors making a statement of solvency, setting out that the directors are of the opinion that the company will be able to meet its obligations and discharge its debts over the next 12 month period, or in the event of its winding up
the company auditors making a report, confirming the information set out in the directors’ statement of solvency
publishing a notice of the proposed share buyback out of capital in the London Gazette
Due to the complexity of buying back shares out of capital, Ask a lawyer for more information.
Company shareholders will generally need to approve the buyback of shares. This is typically achieved by passing an ordinary resolution (ie a majority of the shareholders agree to the buyback). For more information on the shareholder approval process, read Company resolutions.
Where a shareholder’s resolution is to be voted on at a shareholder’s general meeting, a copy of the proposed share buyback agreement (or written details of the terms, if the contract is not in writing) must be made available for inspection for a minimum of 15 days before the meeting. Where the shareholder’s resolution is to be made by written resolution, a copy of the agreement (or written details of the terms) must be sent with the written resolution.
The shareholder whose shares are to be bought back by the company cannot exercise the right to vote attached to the shares being bought back. However, they can exercise the right to vote attached to any other shares they hold.
Reporting a share buyback
Once a share buyback has been made, Form SH03 should be completed. If stamp duty is payable by the company on the purchase, the form, along with a cheque for the stamp duty, should first be sent to HMRC for stamping. A company will be liable to pay stamp duty on the purchase price of the shares unless:
the shares are held on an overseas branch register, or
the purchase price is £1,000 or less and Form SH03 contains the appropriate certification.
Within 28 days, Form SH03 should (once stamped by HMRC, if necessary) be sent to Companies House to report the purchase of own shares.
Where shares are immediately being cancelled on the buyback, Form SH06 should also be filed at Companies House within 28 days.
In addition to the above notifications to Companies House, the company should also:
update its register of members, in light of the shares bought and cancelled by the company from a shareholder in the buyback
cancel the share certificates for the bought back shares
issue new Share certificates (if the shareholder still holds some shares after the buyback)
The company must also keep a copy of the share buyback agreement (or written details of the terms) for 10 years. This must be available for inspection at the company’s registered office by the shareholders.