Company buyback of shares

A company buyback of shares is a popular route for shareholder exits. In many cases, the payment made on a buyback can qualify for capital treatment , which results in the shareholders paying Capital Gains Tax rather than Income Tax on the amount treated as a distribution.

Company share buybacks are also commonly known as a company purchase of its 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 firm with a strong tax capability.
• We have handled many share buybacks and have extensive experience of the legal and tax considerations involved. Familiarity with this specialist 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 the proportion of the company owned by remaining shareholders’
• Support exits under employee share schemes
• Simplify the ownership structure
• Potentially enhance the value of remaining shares by reducing share capital
• Prevent hostile takeovers (less common in private companies)
• Buy back shares from dissenting shareholders following a transaction or restructuring

How a share buy back works

A company buyback of shares is a legitimate method of extracting cash from a private company. Company buybacks provide a route for shareholders, including shareholders who are directors or employees, to realise value from their shares. The legislation and procedure are technical and require careful planning to ensure the transaction is implemented correctly.

Company share buyback rules

The company can generally fund the purchase of its own shares from distributable proceeds. Private companies can also make certain purchases out of capital where the statutory procedures are followed.

A company must also have sufficient funds available to make the payment when the shares are purchased. Where the company does not have sufficient cash available, there may be alternative structures to consider, including multiple completion arrangements where shares are purchased in stages.

The company will generally cancel the share bought back. This can result in the remaining shareholders holding 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 and shareholder have freedom to agree the purchase price for the shares, with no prescribed price under company law.
• The appropriate shareholder approval must be obtained.
• There must be sufficient distributable reserves or another permitted source of funding for the purchase.
• Funding for the transaction is provided by the company in accordance with the applicable statutory requirements
• Remaining shareholders may see an increase in their percentage ownership where the purchased shares are cancelled.

Steps involved in a share buyback

The significant work and time required with a share buyback transaction takes place both before and after signing the agreement. This includes dealing with shareholder approvals, payment requirements, stamp duty, corporate filings and, where appropriate, HMRC clearance. The relevant steps are necessary to ensure that the buyback complies with the relevant requirements of the Companies Act 2006 and the applicable tax legislation.

In terms of approval of a share buyback, the appropriate shareholder approval is required. For an off-market purchase, this will generally involve approval by ordinary resolution, unless the company's articles of association provide otherwise.

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

• Background review of the articles and shareholders' agreement before the share buyback;
• Drafting the share buyback documentation;
• Obtaining shareholder approval; and
• Dealing with HMRC and Companies House filings, including stamp duty requirements where applicable.

Share buyback Agreement

Because it is the company that is buying the shares from a shareholder, a share buyback Agreement sets out the terms on which the company will purchase its own shares from the shareholder. 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 minutes to seek members’ approval for share buy back;
• Shareholder resolutions approving the purchase
• Stock transfer form;
• Companies House filings;
• Calculations and arrangements for any stamp duty payable.

If you repurchase shares out of capital, additional statutory requirements and documentation will apply, including a notice published in the Law Gazette to notify and protect potential creditors.

Funding a company share buy back

Tax law does not prescribe a fixed price per share to be paid by the company for a share buyback. The price is generally a matter of negotiation between the directors and the shareholder.

There is an HMRC requirement that the share buyback must be for the benefit of the company.  To distribute excessive amounts to the shareholder as consideration for the shares bought back, 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 buyback is not properly funded, there can be serious consequences, including potential liability for directors who have acted in breach of their duties. The validity of the transaction may also be challenged, and the shareholder may lose the benefit of the intended tax treatment.
• Buy back from a new share issue - a company can issue new shares to raise funds to finance the buyback. Where this approach is used, it should be clear that the new share issue is intended for this purpose.
• Buy back from borrowing - there are restrictions on the use of borrowing to finance a share buyback, and the position needs to be considered carefully depending on the proposed structure. We review the circumstances with clients and can advise on alternative ways of structuring the transaction where funding presents an issue.
• Deferred company purchase of own shares - where distributable reserves are expected to build up over time, a staged buyback may be an attractive option. Under a staged arrangement, the company can purchase the shares with payment being made over an agreed period. There are company law and tax issues to consider, particularly where consideration is deferred.

HMRC conditions for share buybacks

For a payment on a share buyback to qualify for capital treatment under the relevant provisions, a number of conditions must be satisfied.

Broadly, these include:

• The company must be an unquoted trading company, or an unquoted holding company of a trading group;
• The shareholder must generally have owned the shares for five years or more immediately before the purchase;
• The departing shareholder’s holding must substantially reduced;
• The purchase must be wholly or mainly for the purpose of benefiting the company's trade; and
• The buyback must not form part of a tax avoidance scheme or arrangement

HMRC clearance for company share buybacks

Where appropriate, a company can apply to HMRC for advance clearance confirming that the purchase should qualify for capital treatment. The application needs to include details of the proposed transaction and supporting information in the format required by HMRC.

We can prepare the necessary documentation and handle the HMRC clearance application for you.

HMRC clearance is not appropriate or necessary in every case, and we can advise on whether an application is suitable based on the proposed transaction and the intended tax treatment.

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