For a private company incorporated in England and Wales, a share buyback is an effective method under which entities can restructure ownership, facilitate a shareholder exit or return value to shareholders.
When purchasing its own shares, a company must comply with a detailed statutory framework under Part 18 of the Companies Act 2006 (the “Act”), the key legislation pursuant to which English company law is governed.
What is a share buyback?
A share buyback occurs where a company purchases shares from one of its existing shareholders. Once acquired, those shares are usually cancelled, reducing the company’s issued share capital and increasing the percentage holdings of the remaining shareholders. In some circumstances, shares may instead be held in treasury.
In private companies, buybacks are commonly used to facilitate the departure of a founder or employee shareholder, resolve shareholder disputes, support succession planning or simplify the ownership structure of the business. They can also provide a tax-efficient method of extracting value from the company.
Procedural framework:
The Act imposes strict conditions on a private company acquiring its own shares. The legislation is designed largely to protect creditors and preserve company capital, meaning the procedural requirements are both technical and prescriptive.
As a starting point:
- the shares being bought back must generally be fully paid;
- the company’s articles of association must permit the buyback; and
- the buyback contract must be approved by shareholders before completion.
The process will also usually involve board approvals, shareholder resolutions, a compliant buyback agreement and various post-completion filings with Companies House and HMRC.
Funding the buyback:
One of the most important aspects of any share buyback is determining how the purchase price will be funded.
In most private company buybacks, the purchase is financed using the company’s distributable profits. Alternatively, the company may fund the buyback using the proceeds of a fresh issue of shares.
A private company can also carry out a buyback out of capital, albeit a slightly more complex approach and less common in practice.
Another important point is that, subject to limited exceptions, the purchase price for the shares must generally be paid in full at the time of the buyback. Deferred consideration structures that are common in wider M&A transactions are not usually permissible in a standard buyback arrangement.
Common pitfalls and risk:
To ensure compliance with the Act, it is important to consider the common issues that business owners may fall foul off:
- failing to obtain the correct shareholder approvals;
- using non-compliant funding arrangements;
- inaccuracies within the buyback agreement;
- failing to review restrictions within the articles or shareholders’ agreement; and
- missing HMRC or Companies House filing deadlines.
If the statutory requirements are not followed correctly, the buyback may be void, meaning the shares are treated as never having been bought back at all. This can create significant legal and commercial complications for both the company and its directors.
The role of Culbert Ellis:
At Culbert Ellis, our corporate team regularly advises companies, founders and shareholders on all aspects of private company share buybacks. We assist clients through the entire process - from reviewing constitutional restrictions and structuring the transaction, through to drafting the buyback documentation, obtaining approvals and managing post-completion filings.
Our role is not only to ensure technical compliance with the Act, but also to help clients achieve a commercially effective outcome while minimising future risk.
How To Get In Contact
To find out more or if you require assistance with these matters, speak with our Corporate Team on +44 (0)204 600 9907 or email info@culbertellis.com.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
