Buyback of private company shares

Posted: interalex Date: 29.06.2017

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Simpler rules for buying back shares from employees and other small shareholders - Lexology

Please read our cookies policy for more information. A company may wish to undertake a share buyback for a variety of reasons, including to return surplus cash to shareholders or to buy out a particular shareholder who is seeking an exit.

A buyback that is not carried in accordance with the process in the Act will be void which, in some instances, may have the consequence that the relevant shares are still in issue.

This can cause significant problems where a defective buyback is discovered during due diligence by a potential buyer of a company. For example, we have worked on transactions where shares which the sellers thought had been bought back needed to be repurchased from a previous shareholder who no longer had any involvement with the company.

This can cause significant delays and, at worst, can jeopardise the transaction if the previous shareholder is un-cooperative. In addition, failure to comply with Part 18 of the Act will constitute an offence by the company and each officer in default; the latter may be liable to up to 2 years in prison, an unlimited fine or both.

Therefore, it is very important that the process in the Act is correctly followed. This note does not cover: Under section of the Act, the rules in Chapter 18 of the Act do not apply to acquisitions by private company of its own shares:.

A company no longer requires a specific authorisation in its articles to purchase its own shares other than where the buyback is a small buyback out of capital — see below. However, the articles should be checked to confirm whether the company is prohibited from purchasing its own shares or if there are any specific consent requirements.

If the company is restricted from undertaking a buyback, or if there is a specific consent requirement, then the articles will need to be amended or the relevant consent sought.

If so, then these restrictions will either need to be waived, or the articles amended, by special resolution. For example, in this situation a company may pay for shares in instalments which is otherwise prohibited , buyback the shares out of capital using a simplified process or, if the company is a private company, pass an ordinary resolution authorising multiple buybacks in advance.

Share buybacks pursuant to an employee share scheme are not covered any further in this article. The process that a company needs to follow to purchase its own shares will depend on how the buyback is to be financed. The Act provides that a buyback may be financed out of:. Where specifically authorised to utilise the exemption by its articles, a private company may purchase its own shares out of capital up to an amount, in any one financial year, not exceeding the lower of:.

Where the exemption applies, a private company will be able to use a simplified process and will not need to comply with the more onerous procedure in Chapter 5 of Part 18 relating to buybacks out of capital see below.

The buyback contract will still need to be approved the shareholders see process below. A company may only make an off-market purchase of its own shares in pursuance of a contract approved prior to the purchase in accordance with section of the Act.

The buyback contract should contain all the key terms of the agreement between the company and the selling shareholder s for the purchase of the shares by the company. Either the terms of the contract must be authorised by a resolution of the company before the contract is entered into, or the contract must provide that no shares may be purchased under the contract until its terms have been so authorised by resolution. The resolution can be passed as a written resolution or at a general meeting.

The shareholder whose shares are being purchased will not be able to vote on the written resolution. If the resolution is passed at a general meeting, then the resolution will be ineffective if the shareholder holding shares to which the resolution relates exercises the voting rights carried by those shares and the resolution would not have been passed if those votes had not been exercised.

The resolution approving the buyback contract is not limited in time, so the company may purchase the shares at any time following the passing of the resolution.

An authority for a buyback of shares, or a buyback contract, may be varied by ordinary resolution unless the articles require a higher majority. Again, the proposed variation must be authorised in advance, and the terms of such proposed variation must be made available to shareholders in the same way as set out above.

If the buyback agreement provides for the shares to be paid for in instalments, then the buyback will be void Pena v. Dale [] EWHC Ch. Although this is fairly restrictive, it is permissible for a company to enter into a buyback agreement with multiple completions for the purchase of separate tranches of shares on different dates.

However, each tranche of shares will need to be paid for at the time the relevant shares are bought back. Therefore, a company that enters into a buyback agreement involving multiple completions should ensure in advance that it will have sufficient distributable reserves to purchase each tranche of shares.

Where the company is financing the buyback using the proceeds of a new issue of shares, the Act does not stipulate a time limit for the buyback once the new shares have been issued. However, the company should ensure that the buyback is undertaken as soon as possible following the new issue of shares, so that there is a clear link between the issue and the buyback. The holders of the new shares should be entered into the register of shareholders before the proceeds of the issue are applied to buy back the shares.

Any shares purchased using distributable profits may be cancelled or held in treasury, under section of the Act. If the shares are bought back using the proceeds of a fresh issue of shares, or from cash using the de minimis exemption, then they must be cancelled section b. Where as in most cases the buyback contract is approved by ordinary resolution, the resolution will not need to be filed at Companies House.

The Act does not require that the buyback contract itself is filed, but the company is obliged to keep the contract available for inspection at its registered office for a period of 10 years. The company will also need to file a form SH03 at Companies House within 28 days of the buyback.

Stamp duly of 0. In addition, where the shares which are the subject of the buyback are cancelled, the company will need to file a notice of cancellation on form SH06 with Companies House.

Where the buyback is to be funded out of capital the directors of the company must, in accordance with section of the Act, give a statement which includes the following matters:. If a director makes the statement without having reasonable grounds, then such director will have committed a criminal offence. In addition, where the company is wound up within the year following the buyback, the seller of the shares and any director that signed the statement may be liable, in certain circumstances, to repay the liquidator the amount paid for the shares.

In addition, a further special resolution is required to approve the payment out of capital under section of the Act. As with the resolution approving the buyback contract, a shareholder holding shares which are the subject of the buyback will not be an eligible member for the purposes of the shareholder resolution. If the resolution is passed at a general meeting, then the resolution will only be effective if passed without counting any votes attaching to the shares to which the resolution relates.

Within the week following the resolution approving the payment out of capital, the company must publish a notice in the Gazette and in an appropriate national newspaper or give notice to each of its creditors, stating:.

Where such an application is made, the court hearing the application may order a variety of things, including that the resolution is either cancelled or confirmed.

buyback of private company shares

Where an application to court is made, both the applicant and the company must notify Companies House of the application by filing forms SH16 applicant and SH17 the company. The payment out of capital must be made no earlier than 5 weeks, and no later than 7 weeks, after the date of the resolution approving the payment out of capital.

The special resolution approving the payment out of capital should be filed at Companies House within 15 days. Any shares purchased from capital must be cancelled.

Therefore, the company will need to file both forms SH03 and SH06 at Companies House, and also pay stamp duty on the buyback of the shares if payable ; please see step 3 of section B above.

It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.

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HR Bytes members get priority booking for events, key insight and a range of employment materials for free. FlightDeck is our portal designed especially with start-up and emerging technology businesses in mind to help you get your business up and running in the right way. Guide to share buybacks for private companies Author Adam Kuan. Preliminary issues to consider Do the rules in the Act apply to the proposed buyback?

Under section of the Act, the rules in Chapter 18 of the Act do not apply to acquisitions by private company of its own shares: Otherwise, the rules will apply and the process in Chapter 18 must be followed. How will the buyback be financed? The Act provides that a buyback may be financed out of: Where specifically authorised to utilise the exemption by its articles, a private company may purchase its own shares out of capital up to an amount, in any one financial year, not exceeding the lower of: Process for a share buyback using distributable profits or a new issue of issue of shares Step 1 — approval of the buyback contract by the shareholders A company may only make an off-market purchase of its own shares in pursuance of a contract approved prior to the purchase in accordance with section of the Act.

Private Company Share Buyback

In addition, the buyback contract will need to be made available to shareholders as follows: Step 3 — post buyback Any shares purchased using distributable profits may be cancelled or held in treasury, under section of the Act. The company should update its register of shareholders to reflect the buyback. Step 4 — timing for the payment out capital The payment out of capital must be made no earlier than 5 weeks, and no later than 7 weeks, after the date of the resolution approving the payment out of capital.

Step 5 — post buyback The special resolution approving the payment out of capital should be filed at Companies House within 15 days. For further information, please contact Adam Kuan. Our Cookie Policy On - you agreed to accept cookies from this website - thank you.

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