Cancelling shares

Options and reasons to cancel shares in a private limited company

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 cancel the “original” shares. Unfortunately shares cannot just vanish into thin air. Creative solutions must be used to cancel shares for a private company.

Below are some common solutions :-

Option 1 –  gift shares to the company

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.

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 wants to cancel the gifted shares, it follows these steps to reduce its capital:

• Check the articles of association – do not prevent the company cancelling the shares.
• Solvency statement – the directors must sign a solvency statement;
• Shareholders approval  by special resolution.

If the company reduces its share capital, a form SH19 must be filed at Companies House.

Option 2 – cancel shares and reclassify as a different class of shares

The company could re-classify the shares as a different class of shares, e.g B shares. Then the shareholder rights may have:

• No dividend rights;
• No voting rights;
• Greatly reduced value.

The law requires the following to achieve this re-classification:

• A special resolution varying class rights will be required;
• Form SH02, about varying share rights, filed at Companies House;
• Form SH08, about re-designating shares, filed at Companies House.

Option 3 – share buyback

The buy back 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:

• Check the company’s articles do not limit or prohibit buybacks;
• The articles of association must not expressly limit or prohibit buy backs;
• Gain approval by an ordinary shareholder’s resolution for the contract;
• The company makes an off-market purchase of its own shares.

Sometimes the issue of new shares can finance the buyback. The company can use up to £15,000 or 5% of share capital, whichever is lower. The:

• Directors provide a director’s statement in the prescribed form;
• Notice is published in the Gazette, which puts the world at large on notice of the proposed buy-back.

Unfortunately, there are tax related and procedural complications. We consider this approach as the last resort.

Take away

It is easy to issue shares. Unfortunately, it is complicated to remove shares.