Share buy back: departing employee
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.