Cancelling shares

How to cancel shares in a private limited company

Companies may reorganise their share capital as part of an investment or corporate restructuring and wish to cancel the original shares as part of that process. This may involve creating new share classes or changing the number or nominal value of shares. However, shares cannot simply be cancelled by agreement or removed from the company's records. The appropriate legal procedure must be followed.

Option 1 -  gift shares to the company

Shareholders may consider transferring shares to the company for no consideration. However, a gift of shares to the company is not automatically exempt from the statutory rules governing a company’s acquisition of its own shares. The legal consequences must be considered before proceeding.

A transfer alone does not necessarily cancel the shares. If a capital reduction is proposed, the company must follow the applicable statutory procedure, which may include:

• Checking the articles of association - check whether they permit the proposed arrangements and whether any amendments are required
• Solvency statement - the directors must sign a solvency statement
• Shareholders approval  - generally by special resolution

The relevant Companies House filings must then be made. For a reduction of share capital, this will generally include form SH1, together with the required supporting documents.

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

An alternative may be to reclassify existing shares or create a different class of shares, such as B shares, with different rights. Depending on the commercial objectives, the new class might have:

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

The available options depend on the company’s articles, the existing share rights and the rights intended for the new class. The process may require a special resolution, consent from affected shareholders or a class-rights procedure, together with the appropriate Companies House filings.

The relevant forms depend on the transaction. For example, form SH08 is used to notify a change in the designation of a class of shares; it is not a substitute for obtaining any required shareholder approvals or varying class rights.

Option 3 - share buyback

A company may be able to buy back its own shares, but the procedure depends on the available funding and the company’s circumstances.

Where sufficient distributable profits are available, a buyback may be funded from those profits or, where the statutory requirements are met, from the proceeds of a fresh issue of shares. The process generally involves:

• Checking that the company’s articles do not prohibit or restrict the buyback;
• Obtaining the required shareholder approval for the purchase contract; and
• Completing the purchase and making the necessary Companies House filings.

A private company may also be able to funds from an issue of new shares to finance the buyback.. The company can use up to £15,000 or 5% of share capital, whichever is lower, provided the articles authorise it. The applicable conditions and formalities must be checked before proceeding.

A buyback can involve significant procedural and tax considerations. It should therefore be assessed against the other available options before a route is selected.

Take away

Issuing shares is generally straightforward; cancelling or restructuring existing shares requires careful consideration of the company’s circumstances and the applicable legal procedures.

Please do give us a call on 020 7438 1060 to discuss your transaction. We can help assess the available options and identify a suitable approach.