Share buybacks can be a powerful tool for private companies (in the UK). Whether you are a family-owned business looking to tidy up your shareholder base, a tech company wishing to return value to founders or early investors, or an SME planning succession or an exit, buying back your own shares can simplify ownership and improve flexibility.
However, the process is tightly regulated in England and Wales, and non-compliance may lead to serious tax and legal consequences. In particular, if the process is not duly completed, the buy-back may be invalidated, meaning that the original shareholder remains in place in the register of members. We have seen this cause complications in the due diligence exercise when a company is subsequently to be sold. We have also had clients who did not appreciate that there are strict statutory procedures in place for buybacks and thought they could simply sell their shares back to the company.
Here, we outline 10 key facts and compliance issues every private company should understand before embarking on a buyback. This note does not include information about share buybacks from capital or pursuant to employee share schemes, which have different requirements.
1. Articles of association must permit it
Under the Companies Act 2006, share buybacks are more straightforward than they once were.
Articles of association (Articles) no longer need to authorise a buyback expressly, but equally, they must not prohibit it. However, if your private company’s incorporation pre-dates the Companies Act 2006, your Articles must include authorisation for a share buyback; and if not included, the articles of association must be amended before the buyback can proceed.
Consideration should also be given to waiving any pre-emption provisions on transfers of shares in the Articles.
2. Share Capital
Shares to be repurchased by the company must be fully paid as to their nominal value and any share premium.
You must also ensure that, following completion of the buyback, at least one non-redeemable share remains in issue and not held in treasury
3. Share buyback contract
A written contract must be drawn up between the company and the selling shareholder(s), setting out the main terms of the buyback. This contract must be considered by shareholders and the shareholder whose shares are being bought back cannot vote on it.
4. Shareholder approval is essential
A buyback contract requires an ordinary resolution (more than 50% approval) of the shareholders (unless a shareholders’ agreement or the Articles require a higher approval).
The contract should be approved before it is entered into, or if it has already been executed, then before the actual repurchase of shares by the Company. Note that where a buyback contract is being approved at a shareholder meeting, it must be sent to the shareholders at least 15 days before the meeting and be available for review at the meeting itself.
5. Timing of payment for the share buyback
Where shares have been repurchased by a company, these must be paid for in full and in cash on completion. It is not permitted to pay for the shares in instalments or to defer payment to a later date. It is imperative that the company has sufficient distributable profits to meet fully the payment obligations to the selling shareholders.
6. Cancellation of shares
Repurchased shares must be cancelled upon acquisition unless they are held in treasury (which is generally not available to private companies)
7. Stamp duty obligations
If the buyback price exceeds £1,000, stamp duty at 0.5% is payable. The signed stock transfer form must be sent to HMRC for stamping within 30 days of the completion of the share before shares can be cancelled.
8. Critical Filing Deadlines
The company must file a return of purchase (Form SH03) and a statement of capital at Companies House within 28 days. A company may also need to file a Form SH06 within 28 days of any shares being cancelled. Late filings can invalidate the buyback. Companies must also update the register of members, which should not occur until any applicable stamp duty has been paid. Finally, if there are any changes to the register of Persons with Significant Control, these should also be notified to Companies House within 14 days.
9. Directors’ duties remain paramount
Directors must act in the best interests of the company as a whole and consider the impact on creditors and remaining shareholders. Improper buybacks may lead to personal liability.
10. Final Thoughts
A share buyback can be an efficient solution to consolidate ownership and manage shareholder exits, but it is a regulatory minefield. Advance planning and specialist legal and tax advice are essential to ensure compliance and achieve the desired tax treatment.
At Branch Austin McCormick, we regularly advise private companies, SMEs, and family-owned businesses on the legal aspects of share buybacks and related structuring. We can also assist if you believe you need advice on rectifying a buyback.
If you’d like to discuss whether a buyback is right for your business, please get in touch with Harender Branch, the head of our corporate team at hkb@branchaustinmccormick.com.