Company buyback of shares

A company buyback of shares is a popular route for shareholder exits. In many cases the payment on the buy back will qualify for capital treatment and taxed at lower rates of tax than dividends.

Company share buybacks are also commonly known as a company purchase of own shares.

We are always happy to discuss your situation and provide a scope and fee estimate. Please do give us a call.

Benefits of working with us

• We are a specialist law firm with a strong tax capability.
• We have handled many company purchases of their own shares in our time. Familiarity with the practice area brings expertise and cost savings.
• Accountants refer clients to us in this specialist area.

Common reasons for share buybacks in private companies

• Return surplus cash to shareholders
• Facilitate shareholder exit (e.g. retiring founder or leaver)
• Increase remaining shareholders’ ownership
• Support employee share scheme exits
• Simplify ownership structure
• Enhance share value by reducing share capital
• Prevent hostile takeovers (less common in private companies)
• Buy back shares from dissenting shareholders post-transaction or restructure

How a share buy back works

A company buyback of shares is a perfectly legitimate method of extracting cash from a private company. Company buy backs are a route for shareholders (including shareholders who are directors or employees) to realise value for their shares.  The legislation is strict but our experience ensures legally sound solutions.

Company share buyback rules

The company uses its post-tax distributable reserves to pay for purchase of it's own shares. If the company does not have the cash available to pay for the shares the company cannot buyback the shares. A way around this is often to agree a buy back of shares in instalments.

The company cancels the shares bought back. This means that all remaining shareholders gain an increased share entitlement as there are fewer shares in issue.

Share buybacks - key points

A share buyback is a transaction between an existing shareholder and a company.

• The company can repurchase its shares at any price.
• At least 75% of the shareholding must be bought back - this can be in one instalment or under multiple instalments.
• Shareholder approval is required.
• There must be sufficient distributable reserves.
• Funding for the transaction is from the company.
• All remaining shareholders receive an uplift.

Steps involved in a share buyback

The significant work and time required with a Share Buyback transaction takes place before and after (including payment of stamp duty, corporate filings and dealing with HMRC) the signing of the agreement to ensure that the buyback of shares complies with the strict procedure set out in the Companies Act 2006.

In terms of approval of a share buyback, shareholder agreement is needed. The transaction and the terms must first be approved by the  shareholders, usually by way of an ordinary resolution unless the company articles of association provide otherwise.

We can plan for your company share buy back and oversee implementation for you. There are stages to work through as follows:

• Background review of the articles and shareholders agreement before the share buy back;
• Drafting the share buy back documentation;
• Obtaining shareholder approval; and
• Filings with HMRC for stamp duty and Companies House.

Share buyback Agreement

Because it is the company that is buying the shares from a shareholder, a Share Buyback Agreement is relatively straightforward compared to a situation where a buyer is looking to buy all the shares in a company.

We prepare the documentation needed to implement the company's purchase of its own shares. Typically, the documents required for a share buyback include:

• A share buy back agreement;
• Board meeting notices for members;
• Board meeting minutes to seek members’ approval for share buy back;
• Written resolution to approve share buy back;
• Stock transfer form;
• Company House filings;
• Work out the amount of stamp duty payable.

If you repurchase shares out of capital, then you require further documents and a Law Gazette announcement to notify potential creditors.

Funding a company share buy back

Tax law does not prescribe the price per share to be paid by the company to pay for the share buy back. The price is a matter of negotiation between the directors and the shareholder.  There is an HMRC requirement that the share buy back must be for the benefit of the company.  To distribute excessive amounts on paying for the shares bought back by the company can in some circumstances fall foul of this HMRC requirement. The basic methods of financing a company buying back it's own shares are :-

• Distributable reserves - The company must have sufficient distributable reserves to fund the share buyback.  If the funds are not paid from distributable reserves liabilities can arise. The directors can be held liable for acting in breach of their duties. Other shareholders can attack the company share buyback transaction and void the contract. HMRC can deny beneficial tax treatment for the shareholder.
• Buy back from a new share issue - where the company issues new shares to raise money for the buy back it needs to make it clear that this is the purpose of the share issue.
• Buy back from borrowing - generally prohibited for private companies. We review with clients and discuss HMRC approved ways to restructure the company before the buyback to get around any problems.
• Deferred company purchase of own shares - if distributable reserves are likely to build up in the future a staged buy back can be attractive. Under a staged buy back all of the shares are bought back by the company but payment is deferred over a period of time. There are company law issues to consider and HMRC have put the spotlight on company share buy backs using deferred consideration. 

HMRC conditions for share buyback

• The shareholder must have held the trading company’s shares for five years;
• The departing shareholder’s holding must substantially reduce;
• There must be a solid business case; and
• The buy back cannot be a part of a tax avoidance plan.

There are structures we can consider if the shares have not been held for five years which will result in capital treatment.

HMRC clearance for company share buybacks

If the tax payer qualifies for capital treatment it is possible to obtain a tax clearance from HMRC to this effect. To be successful HMRC need to be provided with details in their agreed format along with accompanying documentation for the company share buy back.  We can draft the documentation and handle the HMRC clearance for you.

There is no point in applying for an HMRC clearance in cases where it is clear that the receipt will be taxed as a dividend.

A few examples of our work

To get an idea of our approach and how share buybacks can work in practice, please do read some of our client case studies :-

• Tax issues on a share buyback
• Forced share buyback
• Brief summaries of share buy back instructions