Share Buy Backs: A Simplified Approach

The independent Nuttall Reviewon employee ownership and share buy backs published in July2012 looked at three key aspects surrounding share buy backsbeing 1) the authorisation of share buy backs, 2) the financing ofshare buy backs and 3) the holding of repurchased shares intreasury. Following the review the Government passed newlegislation to simplify the share buy back regime for private andunlisted public companies.

TheCompanies Act 2006 (Amendment to Part 18) Regulations 2013 ("theBuy Back Regulations") came into force on 30 April 2013 with theaim of increasing flexibility for private and unlisted companies ,reducing the administrative burden on buy backs and also to try tomake employee ownership more attractive.

Thechanges brought about by the Buy Back Regulations can be roughlydivided into those that apply to all off market share buy backs andthose that apply to a buy back of shares for the purposes of orpursuant to an employees' share scheme. A summary of each ofthe key changes is set out below.

Key changes applicable to alloff market buy backs

• Authorisation of share buybacks - A company may now authorise an off-market share buy back byway of an ordinary resolution rather than special resolution i.e. ashareholder resolution that can be passed by a simple majority ofshareholders. In general, this will make it much easier forcompanies to buy back their own shares.
• De minimis exemption -Providing that a company is authorised to do so in its articles ofassociation, it may purchase its own shares with cash in any onefinancial year up to the lower of £15,000 or 5% of the aggregatenominal value of the company's share capital regardless of whetherpurchase is made out of distributable profits or out ofcapital. Companies may wish to consider whether they need toamend their articles of association to allow for this. Thischange will make it easier for companies to buy back either smallamounts of shares or shares of low value.
• Treasury shares - Private andunlisted public companies no longer have to cancel shares they buyback; they may instead hold them in treasury so that they can bereissued at a later date. Guidance provided by the Departmentfor Business Innovation & Skills ("BIS") states that onlyshares bought back from distributable reserves or out of sharecapital using the de minimis exemption may be held intreasury.

Key changes applicable to offmarket buy backs for the purposes of or pursuant to an employees'share scheme

• Payment by instalments - Itused to be the case that a company was required to pay theconsideration for the shares it intended to buy back in full at thetime of the purchase. The Buy Back Regulations now enable acompany to pay for the shares it buys back in instalments. This gives greater flexibility to those companies who wouldstruggle to pay for the shares up front. However, it isadvisable for an exiting shareholder to consider and/or take advicebefore agreeing to payment by instalments, particularly as anyfuture payments may be at risk if the company were to becomeinsolvent.
• Multiple buy backs - The BuyBack Regulations permit a company to authorise in advance multipleoff market share buy backs for up to five years providing it isapproved by an ordinary resolution of the company'sshareholders. The shareholders, by way of the ordinaryresolution, can set certain parameters and conditions which thesefuture buy backs must comply with. For example, theresolution can determine the maximum number of shares that may beacquired and the maximum and minimum prices that may be paid forthe shares. As well as providing companies with greaterflexibility to buy back their own shares, it will mean that theywill not have to incur the costs of individually approving each buyback contract.
• Share buy backs out ofcapital procedure - The Buy Back Regulations have simplified therequirements that a company must fulfil in order to buy back itsown shares out of capital. Companies are now permitted tofinance buy backs out of capital providing they are approved by aspecial resolution of the shareholders which must be supported by adirectors' solvency statement and statement of capital. Inaddition, the payment out of capital must also be made no earlierthan 5 weeks and no later than 7 weeks after the date the relevantshares are surrendered. There is no longer a requirement forcompanies to provide a directors' statement and auditors' reportnor is there a requirement for notice of the payment out of capitalto be published.

The latest BIS guidance statesthat the Government does intend to conduct a full review of the BuyBack Regulations in 2016 to determine whether they have beeneffective and/or whether there have been any unintendedconsequences. However, in the meantime, it is hoped that thenew buy back regime should make it easier for employees of privateand unlisted companies to sell their shares and for such companiesto be able to fund the share buy back.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.