16 FAQs about selling your shares back to your company.
- Why might I want to sell shares back to the company, and why might the company want to buy its own shares?
- Is a company allowed to purchase its own shares?
- Who can authorise the purchase by the company?
- What shareholder resolutions are required?
- Do we need approval from creditors for the company to purchase its own shares?
- How is the price determined?
- Can the company buy back shares when it has 'insider' information?
- Does the company need to have enough retained profits to cover the purchase price?
- Do we need to notify anyone if the company buys back shares?
- What are the tax consequences for me if I sell my shares back to the company?
- What are the tax consequences for the company if it buys back my shares?
- What happens to the shares once the company has purchased them?
- How does the company cancel the shares it has bought back?
- Is there any advantage to holding treasury shares?
- Do treasury shares have the same rights as other shares?
- What are the rules for redeemable shares?
1. Why might I want to sell shares back to the company, and why might the company want to buy its own shares?
If you want to sell your shares in a company - for example, because you work for the company but are retiring or leaving, or you have had a dispute with other shareholders - selling them back to the company may be your best option. For example, you may not be able to find a third party buyer who is acceptable to the company, 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 its borrowings compared to its 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.
Another situation when a company may buy its own shares back is when it operates an employees' share scheme which requires employees to give up their shares when they leave - for example, because they have been dismissed or have resigned to join a competitor. One option in those circumstances is for the company to buy the leaver's shares back and hold them 'in treasury' (see 12, 14 and 15) until a new employee is found to take them over.
2. Is a company allowed to purchase its own shares?
Yes, as long as the company's articles of association do not restrict or prohibit it from doing so. There should be a written contract (or, if it is not in writing, a written memorandum of its main terms). An appropriate shareholders' resolution will need to be passed (see 4).
There are special rules and procedures for private companies wishing to purchase their own shares which do not have enough distributable profits to cover the price and, for public companies, an absolute restriction on buying their shares back except from distributable profits (see 8).
3. Who can authorise the purchase by the company?
Typically, the directors decide the company should carry out the purchase of shares. Before they do so they must check the shares have been paid up (ie the company has been paid the face value, plus any premium, set for the shares when they were issued), and that the company is not restricted or prohibited from buying its own shares back in its articles. In addition, the purchase must be approved by shareholder resolution (see 4).
4. What shareholder resolutions are required?
For a private company, the nature of the shareholder resolution depends on whether the share buy-back is for the purposes of, or pursuant to, an employees' share scheme or not.
Where an off-market purchase of shares is not for the purposes of or pursuant to an employees' share scheme the terms of the purchase contract will need to be authorised by an ordinary resolution of the shareholders (more than 50% of the votes cast must be in favour of the resolution - although the shareholder (or their proxy) whose shares are being bought back cannot exercise the votes attached to those shares). 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. The contract can be approved before it is signed - while it is still a draft - or it can be signed, but made conditional on subsequent approval by the shareholders.
However, where the buy-back is for the purposes of or pursuant to an employees' share scheme a company can buy back its own shares if purchases of own shares for those purposes have been generally authorised by an ordinary resolution of the shareholders. This means that a company can carry out multiple buy-backs of its own shares for the purposes of or pursuant to an employees' share scheme without having to get each individual buy-back contract approved by shareholder resolution, provided the shareholders have passed the relevant ordinary resolution.
If the company is purchasing shares out of capital (see 8), an additional special resolution is required to approve this.
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.
5. Do we need approval from creditors for the company to purchase its own shares?
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. Unless the shares are being bought back for the purposes of or pursuant to an employees' share scheme, you must notify your creditors of your intention to buy back shares out of capital, 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.
6. How is the price determined?
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. If the buy-back is for the purposes of or pursuant to an employee share scheme the shareholder and the company can agree that the purchase price will be paid in installments. Otherwise it must be paid in full at the time.
7. Can the company buy back shares when it has 'insider' information?
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.
Company directors 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.
8. Does the company need to have enough retained profits to cover the purchase price?
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 - it can make a payment out of capital. However, if it does, it must (subject to one exception for small cash payments - see below) follow extremely complex procedures, which vary according to whether the buy-back is for the purposes of or pursuant to an employees' share scheme or not. Particularly, unless the shares are being bought back for the purposes of or pursuant to an employees' share scheme, creditors have rights to object to the buy-back, which means that special time limits apply (see 5).
An exception exists if, in the course of a financial year, the aggregate amount the company uses to fund buy-backs is less than whichever is the lower of:
- £15,000; or
- the nominal value of 5% of the company's share capital at the beginning of the financial year
and the company is authorised to do so by its articles of association, it can treat the payment(s) as a capital payment but does not have to follow the usual complex procedures for such payments.
This exception is often used in connection with employees' share schemes, to buy out 'bad leavers' (such as employees who have been dismissed or who have left to join a competitor) who, under the scheme, must offer their shares back when they leave, and are only entitled to be refunded the amounts they originally paid for their shares (even if the shares are in fact worth much more).
It is also possible for a company to make a bonus issue and use the cash raised to fund a buy-back. Again, a complex procedure must be followed.
Legal advice will always be required before deciding which funds to use for a buy-back, and on the procedure to be followed in each case.
9. Do we need to notify anyone if the company buys back shares?
You need to notify Companies House within 28 days of any share purchase and, if the shares being bought back are cancelled, notify Companies House of that too. 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, and provide it with specified documents relating to the purchase.
You must also inform HM Revenue and Customs of the buy-back.
10. What are the tax consequences for me if I sell my shares back to the company?
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.
11. What are the tax consequences for the company if it buys back my shares?
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.
12. What happens to the shares once the company has purchased them?
Bought-back shares can be automatically cancelled or can sometimes be held 'in treasury'. Shares held in treasury can later be sold, transferred in connection with an employees' share scheme (eg when an employee exercises a share option) or cancelled.
However, a company can only choose to hold shares in treasury if the buy-back was from distributable profits.
13. How does the company cancel the shares it has bought back?
Except for 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.
14. Is there any advantage to holding treasury shares?
Holding treasury shares may be helpful if your company 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.
It can also be more efficient to hold employees' scheme shares in treasury after they have been bought back by the company from an employee who is leaving, until a new employee can be found to take them over. This avoids having to set up an Employee Benefit Trust to hold the shares.
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.
15. Do treasury shares have the same rights as other shares?
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.
16. What are the rules for redeemable shares?
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.