BLP WS12
Share Transfers and Buy-back
Share buy-backs Generally
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).
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 buyback 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 out of capital if cost of buyback > 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 (f – fairness of shareholders)
particularly) when considering whether the BB is in the best interests of the company and makes
commercial sense
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
commercially A BB threatens this as the company gives away money for no consideration (shares are
immediately cancelled under s706(b)(i)), so shareholders are missing out on profits.
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.
1
, BLP WS12
Capital redemption reserve will need to be created or is created if already exists.
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 be Increase of chance of company insolvency as
put to work to 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 are
Approval exceptions:
When a de minimis provision applies
Board resolution will be sufficient if company articles allow for this and 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.
2
Share Transfers and Buy-back
Share buy-backs Generally
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).
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 buyback 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 out of capital if cost of buyback > 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 (f – fairness of shareholders)
particularly) when considering whether the BB is in the best interests of the company and makes
commercial sense
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
commercially A BB threatens this as the company gives away money for no consideration (shares are
immediately cancelled under s706(b)(i)), so shareholders are missing out on profits.
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.
1
, BLP WS12
Capital redemption reserve will need to be created or is created if already exists.
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 be Increase of chance of company insolvency as
put to work to 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 are
Approval exceptions:
When a de minimis provision applies
Board resolution will be sufficient if company articles allow for this and 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.
2
