INTRODUCTION
In the UK, a significant number of companies are small, owner-managed, businesses which are typically
established by friends and family who share a common objective. However, as time passes, individuals
and their priorities may change and disagreements may arise regarding the company’s trajectory, with
shareholders holding differing opinions. Consequently, a shareholder may wish to exit the company
and sell their shares. Alternatively, the Company may wish to remove a shareholder and offer to buyback their shares on favorable terms. In such circumstances, it is prudent that the terms of any such
transaction are recorded in a share buy-back agreement.
SHARE BUY-BACK
Generally, a company is prohibited from acquiring its own shares, unless certain conditions are
satisfied, and certain procedures followed. The requirements for a share buy-back are set out in Part
18 of the Companies Act 2006.
KEY REQUIREMENTS
• The Company’s Articles of Association – It is essential to review the Articles to confirm that
there are no limitations or restrictions on share buy-backs. In the event that the Articles restrict
or prohibit buy-backs, shareholders can amend the Articles by Special Resolution which
requires the support of no less than 75% of the shareholders.
• Pre-emption Rights – these grant the other shareholders in a company the first opportunity to
purchase shares before they are transferred. Consequently, if the company’s Articles provides
for pre-emption rights, the directors must consider how to override them, possibly through a
further Special Resolution.
• Financing the Buy-Back – the buy-back must be financed either out of distributable reserves,
the proceeds of a fresh issue of shares or, in the case of a private limited company only, out of
capital.
• Consideration – Payment for the share buy-back must be made at the time of completion,
without any postponement or conditions.
• Shareholder Approval – Shareholder approval is necessary. This is typically achieved through
an Ordinary Resolution which requires a simple majority vote (more than 50%) for approval.
However, this is subject always to the company’s Articles.
• Shares Fully Paid Up – The Company is prohibited from re-purchasing any shares that have not
been fully paid for. Consequently, the shareholder must ensure that their shares are fully paid
before proceeding with the buy-back.
POST BUY-BACK
Shares can either be cancelled or held in treasury. If held in treasury, the shares are stored rather than
cancelled, allowing for potential transfer or sale at a later date. However, holding shares in Treasury is
only permissible if the buy-back was carried out using distributable profits.
Further, where the buy-back is approved by Ordinary Resolution, there is no requirement to file the
Ordinary Resolution with Companies House. However, if the buy-back is approved via Special
Resolution, the Special Resolution must be filed with Companies House.
CONCLUSION
Non-compliance with the correct processes and failure to satisfy the required conditions can lead to
severe legal consequences for the company and/or its directors. These consequences may include
unlimited fines for the company and/or its directors and imprisonment for the directors for a maximum
period of 2 years. Additionally, shareholders may face repercussions as the share buy-back agreement
may be deemed void, necessitating repayment to the company. Consequently, it is important to seek
the guidance of a solicitor who will guide you through the proper procedures and advise on post completion matters such as stamp duty and updating the Person with Significant Control Register.
Written By Kerri McGrory
Contact McCay Legal Today On; 02871 371705