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:
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.