BLP WS12
Share transfer and buy-back
Share buy-backs generally
Maintenance of share capital is one of the main principles of company law – a company cannot generally buy their
shares back from the shareholders (there are exceptions)
After shareholders have paid for their shares, the money produced constitutes the company’s capital
A company may not buy-back its own shares from its members except in accordance with the provisions of Part 18
of the Companies Act 2006 (s658).
Public company (LOOK FOR PLC) can never buyback shares.
If a company buys back its shares without following the Part 18 procedure:
o An offence is committed by the company and every officer in default.
o The acquisition of shares is void.
How to fund a share buy-back
A share buy-back can be funded out of:
Distributable profits (s692(2))
From the proceeds of a fresh issue of shares (s692(2))
Capital (s692(1)).
If the buy-back is financed out of capital, there are additional procedural
requirements which must be met (s713)
SEE PROCEDURE PLANS
Decision-making
Directors will need an ordinary resolution to approve the buy-back (s694(2)).
If buy-back out of CAPITAL, directors need a special resolution (s716(1)).
Buy-back out of capital if cost of buyback is MORE than distributable profits
Distributable profits = profit and Loss reserve on balance sheet
Why a buy-back No one wants to buy
of shares would Returns cash to shareholder whose shares are being bought and who cannot find a third party to
be considered buy their shares from them
Reduced number of shares overall = increased earnings per share = company more attractive to
investors
Increases the value of existing shares for remaining shareholders
Way of getting rid of director/problem shareholder who will not resign from board unless shares
are bought at fair price (assuming other directors don’t want to buy them) – this may be good
commercial reason for BB
Directors Directors must always consider their statutory duties (under s172 (promote success of the
company) - does it make commercial sense?
s706(b)(I) of the CA 2006 provides that bought-back shares are usually cancelled – meaning they
pay the shareholder for them, but they receive nothing in return. The money leaves the
company permanently
Why a buy-back Shareholders will ultimately receive the company’s accumulated profit via:
could be o Dividends during company’s lifetime
problematic o Receiving their share of assets/proceeds should company go into solvent liquidation
1
, BLP WS12
commercially A BB threatens this company gives away money for no consideration (shares are
immediately cancelled under s706(b)(i)), so shareholders are missing out on profits
from their investments
Might cost company capital if all profits are used
Effect of buy-back A company does not become holder of its own shares
Issued share capital is decreased by the nominal value pf the shares
Voting control may have altered – consider for each SH
Capital redemption reserve will need to be created or is created if already exists
Where shares are redeemed or purchased wholly or partly out of distributable profits, the Act requires a transfer
to be made to the capital redemption reserve. [CA 2006 s733] In such a case when the purchase is wholly out of
distributable profits, the amount of the required transfer is the amount by which the company’s share capital is
diminished on cancellation of the shares, i.e. the nominal value of the shares.
Share premium account is reduced if premium is paid on buy-back or redemption has been
financed out of fresh issue of shares
Shareholders’ concerns Creditors’ concerns
The lost money spent on BB cannot now Increase of chance of company insolvency as
make profits for SHs funds depleted
The company’s funds could be so severely If the BB is made partly or fully from existing
depleted that it is more vulnerable to share capital, should the company become
insolvent liquidation. SHs are at the bottom insolvent, the original pool of capital has been
of the list to get paid out on liquidation so reduced, so there is less to share out among
are unlikely to recoup any of their creditors
investment
Voting control – whether they can block
resolutions
Shareholder Because it affects their interests, shareholder approval is usually required for a buy-back, but there
approval are exceptions:
When a de minimis provision applies
Board resolution will be sufficient if
o (a) company articles allow for this; and
o (b) amount of cash used to fund buy-back is lesser of £15,000 or 5% of the
company share capital in the financial year
For buyback for purposes of employees’ share scheme
Only a special resolution and solvency statement requirement
Reduction of capital (different from buyback from capital)
Ss641-644 Companies Act 2006 deal with reduction of capital.
A private limited company may reduce its capital, provided its articles do not prohibit this, by:
o special resolution
o supported by a solvency statement made by the directors.
There is no requirement for the solvency statement to be supported by an auditor's report.
The solvency statement should be made not more than 15 days before the date on which the special resolution is
passed (s642(1)(a) Companies Act 2006)
Transfer of shares
SEE PROCEDURE PLAN
2
Share transfer and buy-back
Share buy-backs generally
Maintenance of share capital is one of the main principles of company law – a company cannot generally buy their
shares back from the shareholders (there are exceptions)
After shareholders have paid for their shares, the money produced constitutes the company’s capital
A company may not buy-back its own shares from its members except in accordance with the provisions of Part 18
of the Companies Act 2006 (s658).
Public company (LOOK FOR PLC) can never buyback shares.
If a company buys back its shares without following the Part 18 procedure:
o An offence is committed by the company and every officer in default.
o The acquisition of shares is void.
How to fund a share buy-back
A share buy-back can be funded out of:
Distributable profits (s692(2))
From the proceeds of a fresh issue of shares (s692(2))
Capital (s692(1)).
If the buy-back is financed out of capital, there are additional procedural
requirements which must be met (s713)
SEE PROCEDURE PLANS
Decision-making
Directors will need an ordinary resolution to approve the buy-back (s694(2)).
If buy-back out of CAPITAL, directors need a special resolution (s716(1)).
Buy-back out of capital if cost of buyback is MORE than distributable profits
Distributable profits = profit and Loss reserve on balance sheet
Why a buy-back No one wants to buy
of shares would Returns cash to shareholder whose shares are being bought and who cannot find a third party to
be considered buy their shares from them
Reduced number of shares overall = increased earnings per share = company more attractive to
investors
Increases the value of existing shares for remaining shareholders
Way of getting rid of director/problem shareholder who will not resign from board unless shares
are bought at fair price (assuming other directors don’t want to buy them) – this may be good
commercial reason for BB
Directors Directors must always consider their statutory duties (under s172 (promote success of the
company) - does it make commercial sense?
s706(b)(I) of the CA 2006 provides that bought-back shares are usually cancelled – meaning they
pay the shareholder for them, but they receive nothing in return. The money leaves the
company permanently
Why a buy-back Shareholders will ultimately receive the company’s accumulated profit via:
could be o Dividends during company’s lifetime
problematic o Receiving their share of assets/proceeds should company go into solvent liquidation
1
, BLP WS12
commercially A BB threatens this company gives away money for no consideration (shares are
immediately cancelled under s706(b)(i)), so shareholders are missing out on profits
from their investments
Might cost company capital if all profits are used
Effect of buy-back A company does not become holder of its own shares
Issued share capital is decreased by the nominal value pf the shares
Voting control may have altered – consider for each SH
Capital redemption reserve will need to be created or is created if already exists
Where shares are redeemed or purchased wholly or partly out of distributable profits, the Act requires a transfer
to be made to the capital redemption reserve. [CA 2006 s733] In such a case when the purchase is wholly out of
distributable profits, the amount of the required transfer is the amount by which the company’s share capital is
diminished on cancellation of the shares, i.e. the nominal value of the shares.
Share premium account is reduced if premium is paid on buy-back or redemption has been
financed out of fresh issue of shares
Shareholders’ concerns Creditors’ concerns
The lost money spent on BB cannot now Increase of chance of company insolvency as
make profits for SHs funds depleted
The company’s funds could be so severely If the BB is made partly or fully from existing
depleted that it is more vulnerable to share capital, should the company become
insolvent liquidation. SHs are at the bottom insolvent, the original pool of capital has been
of the list to get paid out on liquidation so reduced, so there is less to share out among
are unlikely to recoup any of their creditors
investment
Voting control – whether they can block
resolutions
Shareholder Because it affects their interests, shareholder approval is usually required for a buy-back, but there
approval are exceptions:
When a de minimis provision applies
Board resolution will be sufficient if
o (a) company articles allow for this; and
o (b) amount of cash used to fund buy-back is lesser of £15,000 or 5% of the
company share capital in the financial year
For buyback for purposes of employees’ share scheme
Only a special resolution and solvency statement requirement
Reduction of capital (different from buyback from capital)
Ss641-644 Companies Act 2006 deal with reduction of capital.
A private limited company may reduce its capital, provided its articles do not prohibit this, by:
o special resolution
o supported by a solvency statement made by the directors.
There is no requirement for the solvency statement to be supported by an auditor's report.
The solvency statement should be made not more than 15 days before the date on which the special resolution is
passed (s642(1)(a) Companies Act 2006)
Transfer of shares
SEE PROCEDURE PLAN
2
