Share buy back: departing employee

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Companies that offer employees shares can now more easily buy back employees shares. Companies can hold these shares as “treasury” shares, allowing them to perform a share buy back whilst keeping the same number of 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.

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.