Share Buy-Backs: how may a company purchase its own shares?
The Companies Act 2006 contains detailed provisions setting out the procedure for a company to purchase its own shares. It is important for directors and shareholders to know that the procedure is available. There can be tax reasons that justify a company buying shares back from a shareholder, although tax advice from an accountant or appropriately qualified tax adviser should first be taken before initiating a share buy-back.
Buy-backs can occur via an "off-market purchase" or a "market purchase". A general rule regardless of the particular procedure used is that a limited company may only purchase its own shares out of the distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose of financing the purchase.
Off-market Purchases
An "off-market purchase" is a share buy-back occurring where the shares are not purchased on a recognised investment exchange (or are done so but not subject to a marketing arrangement on the exchange). "Off-market purchases" will be the most common way for private limited companies to buy-back their own shares. In summary the requirements for off-market purchases are:
- a share purchase contract between the company and the relevant shareholder must be approved by special resolution of the company's shareholders (holders of the shares to which the resolution relates may not vote on the resolution).
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The time limits applicable to circulating proposed written resolutions in advance to every eligible shareholder must be observed.
Market Purchases
Market purchases require an ordinary resolution rather than a special resolution. The main difference between a "market purchase" and an "off-market purchase" is that "market purchases" are purchases by the company of its own shares made on a recognised investment exchange.
Contract Inspection for Off-market and Market Purchases
As far as record-keeping goes, it is important for companies to note that the share purchase contract (or a memorandum of its terms) and any variation to the contract must be retained at the company's registered office or other specified place for at least ten years from the conclusion of the contract. The company must notify the registrar of the place where the contract is available for inspection if other than the registered office. For private companies it must be made available for inspection by any of its shareholders and public companies by any other person. Failure to comply with the inspection provisions can lead to fines.
Companies House filing requirements following the buy-back
Following the purchase of its own shares by a company, a return must be delivered to the registrar within 28 days of the shares being delivered to the company. If shares are then cancelled, notice of the cancellation must also be given to the registrar within the same period.
To discuss in detail the procedure for a company to purchase its own shares or for more information on company or commercial law please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by phone on 0207 611 4848.
