I have been dealing with a number of share buybacks of ordinary shares within Limited companies recently and it has become apparent that it can cause significant amounts of confusion with shareholders.

Share buybacks are when a company repurchases shares from its shareholders for an agreed price.

Share buybacks can happen for many reasons including as part of an exit strategy for a shareholder. The shares are effectively removed (cancelled) leaving the remaining shareholder(s) with their existing shares albeit with an increase in ownership percentage.  There is no new investor effect.

The Companies Act 2006 is very detailed on this matter and I won’t bore you with the technicalities, but I will highlight some of the key points:

The main methods in which shares can be bought back are out of distributable reserves, out of proceeds from a fresh issue of shares, or out of capital. The method chosen will depend upon the company’s finances, its Articles of Association and its ultimate aim of performing the buyback.

• Purchases Out of Distributable Reserves
  • This predominantly refers to using the net accumulation of profits and losses within the balance sheet i.e. the P&L Reserves. This is subject to further detailed rules but these do not affect all companies.

• Purchases Out of Proceeds from the Fresh Issue of Shares
  • Exactly as it says, the proceeds must meet the price of purchase.

• Purchases Out of Capital
  • If there are not enough reserves to facilitate a share buyback then a payment out of capital can be made subject to further detailed rules.

• It is not lawful unless the following documents are produced:
  • Directors’ Statement & Auditor’s Report (and be available for inspection)
  • Approval by Special Resolution
  • Public notice of proposed payment

There are three fundamental things to remember:

• A limited company may not purchase its own shares if as a result of the purchase there would no longer be any issued shares of the company other than redeemable shares or shares held as treasury shares.

• A limited company may not purchase its own shares unless they are fully paid.

• Where a limited company purchases its own shares, the shares must be paid for on purchase

The relevant forms must be filed at Companies House:

• A company must deliver a form SH03 “Notify a Purchase of Own Shares” to Companies House within 28 days after the buyback.

• A company must deliver a from SH06 “Notify a Cancellation of Shares” along with the form SH03 above. It is generally considered that shares bought back will subsequently be cancelled.

I have only touched upon the main points in this section but I hope it gives some idea of the complexities involved. Failure to abide by the rules as summarised above can lead to potential fines and even imprisonment, something none of us would want.

If you are still confused and want more advice, please contact your Barnes Roffe partner.