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Share buy back: departing employee

Companies that offer employees shares can now more easily buy back employees shares. Companies can hold these shares as “treasury” shares.

At present, when a company buys back a shareholder’s shares, the shares are described as “cancelled”. This means they no longer exist, e.g. A company has 50 shares, and buys back 5 shares. So the company’ shares reduce to 45 shares.

These changes came into force on 30 April 2013. See Government press release.

Share buyback restrictions

To avoid abuse, traditional share buyback restrictions included:

  • Special resolution:  75% of shareholders must vote in favour of the buyback;
  • Special resolution: required for each buyback;
  • The shares must be funded straightaway in cash;
  • Distributable reserves: However, it is possible to pay for the shares from:
    • Proceeds of a fresh issue of shares made to finance the buyback,
    • Out of capital.

Simpler share buy-back rules

Each of the following changes simplifies how a company buys back a departing employee’s shares:

  • Share buy-backs can be purchased in instalments,
    • No requirement to immediately pay in cash;
  • Ordinary shareholder resolution required,
    • Just requires a majority of shareholders;
  • Single shareholder resolution can approve multiple buyback;
  • Company can fund the buyback even if distributable reserves unavailable,
    • Up to an annual cap of the lower of £15,000 or 5% of the share capital value.

Treasury Shares and share buy backs

Treasury Shares also simplify employee share schemes. Traditionally, only public companies can retain shares from a buy-back as Treasury Shares.  Then public companies can sell or give these shares to other shareholders.

Private companies can now hold Treasury Shares.  Private companies can buy-back shares and not cancel them.   When a company cancels shares, the shares no longer exist. This changes other shareholder’s percentage ownership, since the number of issued shares changes. This is beneficial, because:

  • Companies find it harder to keep shares to later award to other employees;
  • Some shareholders might lose out on tax breaks, since they cross particular ownership thresholds;
  • No need to administer complex employee benefit trusts, which
    • Traditionally kept shares to award to other employees.

Catherine Gannon is a member of the employee share plan team.  There are many surveys and statistics which show that companies with employee share plans in place out perform those without.  We implement a wide range of solutions for a wide range of business needs.

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