Companies often reorganise their share capital as part of an investment or re-structuring. They end up with classes of shares of greater or lesser denominations. Then companies want to expunge the “original” shares. Unfortunately shares cannot just vanish into thin air.
Below are some common solutions:
The shareholders could gift their shares back to the company, for no payment or consideration. Since these shares are a gift, the company need not comply with the formalities required to purchase its own shares. All that is necessary is a stock transfer form to transfer legal title. Since there is no payment, there is no stamp duty to pay.
Admittedly the Companies Act 2006 does not specifically confirm the details. It seems the gifted shares continue to exist. However, on the register of members the company is listed as the holder of those shares.
If the company wanted to then cancel the gifted shares, it follows these steps to reduce its capital:
If the company reduces its share capital, a form SH19 must be filed at Companies House.
The company could re-classify the shares as a different class of shares, e.g B shares. Then those shares have:
The law requires the following to achieve this re-classification:
The procedure depends whether the company has sufficient distributable profits or not.
If there are sufficient retained profits, the company can buy-back its shares using the company buy-back procedure. There are three steps:
Sometimes the issue of new shares can finance the buy-back. The company can use up to £15,000 or 5% of share capital, whichever is lower. The:
Unfortunately, there are tax and procedural complications. We consider this approach as the last resort.
Since 30th April 2013 private companies can buy-back company shares, even if the company lacks sufficient distributable reserves. This new procedure is especially useful for buying-back employee shares.
First ensure the company’s articles do not prohibit the company buying back its shares. Note the articles of association must expressly limit or prohibit buy backs;
Unless the restriction is entrenched, which requires an article to prevent subsequent amendments, the article can be amended. Amending the articles just requires a special resolution, that needs 75% of the shareholder votes.
Secondly, ensure the company’s shareholder agreement contains no pre-emption rights. Such rights might require the company to first offer shares to current shareholders before transferring shares to ANY other party, including the company.
Most likely, the company can only purchase the shares at their nominal value.
It is easy to issue shares. Unfortunately, it is complicated to remove shares.