If you want to sell shares — for example, because you are retiring or have had a dispute with other shareholders — selling them to the company may be your best option. For example, you may not be able to find an acceptable third party buyer, or existing shareholders might not be able to afford to purchase your shares (or you may simply not want to deal with each other).
As far as the company is concerned, purchasing its own shares may be a sensible way of using spare cash or of adjusting its gearing (the level of borrowings compared to shareholders' funds). Public or larger private companies may also wish to purchase shares to increase the value of the remaining shares, to increase the dividends each remaining share gets, and to help maintain a healthy market in the shares.
Yes, as long as the company’s articles of association do not restrict or prohibit it from doing so. There must be a written contract (or, if it is not in writing, a written memorandum of its main terms). An appropriate shareholders’ resolution approving the contract will need to be passed (see 4).
There are restrictions on companies purchasing their own shares if they do not have enough distributable profits to cover the price (see 8).
Typically, the directors carry out the purchase of shares. Before they do so they must check the company is not restricted or prohibited from buying its own shares back in its articles, and the purchase contract must be approved by shareholder resolution (see 4).
For a private company, the terms of the purchase contract will need to be authorised by a special resolution of the shareholders (at least 75% of the votes cast must be in favour of the resolution). If the resolution is being put to a meeting, the contract has to be available for inspection at least 15 days before the meeting, and at the meeting itself. If it is being passed by a written resolution, in lieu of a meeting, it must be sent with or before the written resolution is sent. If the company is purchasing shares out of capital (see 8), an additional special resolution is required to approve this. There are complicated rules about who can vote on these resolutions, the net effect of which is that it is usually best to ask the shareholder whose shares are being bought back not to vote.
If the shares are being bought back from a director or someone connected with them, and the transaction is worth more than £100,000 or 10% of the company’s net assets (whichever is lower), it will also need approval of the shareholders as a ‘substantial property transaction’.
For a public company, purchases of shares through the market (eg the Stock Exchange) can be approved by an ordinary resolution of the shareholders (more than 50% of the votes cast must be in favour). The resolution must specify the maximum number of shares to be purchased, the minimum and maximum prices that can be paid, and how long the authorisation lasts (at most 18 months). If the shares are to be purchased ‘off market’ (for example, from one particular shareholder) a special resolution is required to approve the contract between the company and the shareholder.
If you are purchasing your own shares using distributable profits, you do not generally need approval from your creditors. However, creditors may have direct or indirect influence through your agreements with them. For example, your creditors might have the right to immediate repayment if your gearing ratio of debt to shareholders' funds exceeds a certain level - and purchasing your own shares might trigger this right.
If you are purchasing shares out of capital, special rules apply to protect creditors. You must notify your creditors of your intention, directly or by advertising in both the London Gazette and a national newspaper. Your creditors will have five weeks after the resolution authorising the share purchase is passed to apply to the court to cancel the resolution and prevent the purchase.
For a private company the price is determined by the directors (who may find they have to comply with terms in the company’s articles of association governing valuation of shares on a buy-back). The shares must be paid for in cash.
Not if it is a public company whose shares are traded on a regulated market such as the Stock Exchange. The laws on insider dealing apply to purchases by such a company in the same way as to purchases by individuals. The company must not, therefore, purchase its own shares when the directors have price sensitive information that is not generally known.
To comply with Stock Exchange rules, public companies should not purchase their own shares during the ‘close period’ (usually two months) before interim or final results are announced. They can do so, however, in connection with an employee share scheme.
Directors of private companies must ensure they are complying with their general statutory duties under the 2006 Companies Act when embarking on a share buy back, but in practice this is not usually a problem.
A public company may only purchase its own shares using retained distributable profits.
A private company can purchase its own shares even when it does not have sufficient distributable profits, but special rules apply. The directors must make a statement to Companies House that the company does not risk immediate insolvency, and will be able to continue as a going concern for the next year. This statement must be supported by an auditors’ report. Creditors have rights to object to the buy-back, which means that special time limits apply (see 5). Legal advice will always be required.
You need to notify Companies House within 28 days of any share purchase. Public companies must also notify the exchange on which the shares are traded (eg the Stock Exchange or AIM).
If the purchase is being made out of capital, you must give your creditors advance notice (see 5 and 8). You must also advise Companies House, with a copy of the directors’ statement and the auditor’s report.
If the company purchases the shares for more than their original issue price, the excess is normally treated as a distribution of profits (like a dividend). This income is then subject to income tax.
The remainder of the purchase price (up to the original issue price of the shares) is taken as the sale price for Capital Gains Tax purposes. If you purchased the shares for more than their original issue price, this will lead to a capital loss that can be set against any capital gains that you have.
In some circumstances it is possible for the whole of the price paid on repurchase of shares by an unlisted company to be taxed as capital gains rather than income. This can reduce the total tax payable. As this is a complex area, you should take advice.
Stamp duty at 0.5% (rounded up to the nearest £5) is payable on the purchase price, and the form SH03 that has to be submitted to Companies House within 28 days of the purchase must be sent to the Stamp Office of HM Revenue & Customs (HMRC) to be stamped before it is sent to Companies House.
There is an exception if the price paid is £1,000 or less and the form is certified as such, in which case no stamp duty is payable, and the form does not have to be submitted to HMRC before being sent to Companies House.
Beyond that, the purchase of shares does not usually have a direct effect on the company’s profits or tax position.
In a private company, the shares are automatically cancelled. A public company has the option to cancel the shares or to hold them 'in treasury'. Shares held in treasury can later be sold, transferred in connection with an employee share scheme (eg when an employee exercises a share option) or cancelled.
Except for public companies that decide to hold the bought-back shares as ‘treasury shares’ (see 14), when a company purchases its own share the shares are automatically cancelled. For example, if the company buys back 100 shares of £1 each, the company’s issued share capital is automatically reduced by £100. You must notify Companies House (on Form SH03) within 28 days. There may be stamp duty – see 11.
Holding treasury shares may be helpful if your company is public, and wants to be able to provide new shares relatively frequently. For example, you could sell treasury shares opportunistically when the market price is high. You could also use treasury shares to satisfy employees’ share options. In both cases, treasury shares are likely to be a more cost-effective and flexible solution than organising new share issues.
Treasury shares also offer a technical advantage if you wish to buy back shares and later resell them. If you resell the shares for a price at least equal to the price at which you bought them, there will be no reduction in distributable profits. Cancelling shares and later issuing new ones, however, does reduce distributable profits and can thus limit your ability to pay dividends.
Shares held in treasury do not have voting rights, and no dividends of any kind are paid in respect of them. However, if fully paid bonus shares (ie requiring no payment) are issued, the company will receive these in respect of any treasury shares it holds.
Redeemable shares can be 'cashed in' in certain circumstances - the shareholder gets back the money they have paid for their redeemable shares. They are normally used to attract investment from venture capitalists, or other outside investors, because they offer an easy exit route for them.
Redeemable shares are normally redeemed in accordance with the agreement under which they were issued - typically on a set date at a set price. They can normally only be redeemed using distributable profits or the proceeds of a new share issue.
If the company wishes to purchase redeemable shares at an earlier date than specified in the agreement, this is treated in the same way as any other purchase by the company of its own shares.