Share Buybacks - Proceed with caution!

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Corporate Article

26 November, 2019

An in-specie contribution is a viable alternative to transferring cash into a pension scheme, and can include assets such as property or shares. Dangers can arise where the shares held in the pension scheme are bought back by the company for cash.

Private limited companies can make use of a mechanism under the Companies Act 2006 (the "Act") to buy back their own shares (whether for cancellation or to be held in 'treasury') to provide an exit strategy for a shareholder leaving the business or to return value to one or more shareholders, in this instance the pension scheme.

A valid share buyback

A share buyback must comply with the prescriptive steps set out in Part 18 of the Act 2006. Quite often, the requirements of the Act for a share buyback are overlooked. Some of the key provisions which are frequently not complied with include:

1. The need for distributable profits

Funding a buyback using a company's distributable profits is one of the most common ways of funding such procedure. Prior to engaging in this procedure, a company should consult their accounts to ensure that there are sufficient distributable profits available to facilitate the buyback.

2. Full and complete payment shall be provided for the buyback of shares on completion

The Act requires that payment for the buyback of shares must be made in full on completion - deferred consideration nor advance payments are acceptable. Where a company does not have the entire funds available at completion to fund the buyback, they could potentially under the buyback in tranches. A share buyback which occurs in tranches requires there to be sufficient distributable profits at each point a purchase of shares occurs. However, this may not be a desirable option where a shareholder is wanting to be removed from a company immediately.

3. Obtaining shareholder approval

The buyback of shares requires the shareholders of the company to pass an ordinary resolution (passed by way of a simple majority of all shareholders other than the shareholder whose shares are being bought back). It is essential that the shareholder resolution approving the buyback of shares is documented.

4. Restrictions in the articles of association

It is necessary for a company to check their articles of association for any prohibitions regarding the buyback of shares.

Consequences of non-compliance

Failing to comply with any of the above requirements of the Act can have some serious repercussions for a company. Examples include:

  • The acquisition being void and the pension scheme may be deemed to still be the lawful shareholder of the shares.
  • All shareholder resolutions passed by the company since the purported buy back will be invalid because they will not have been voted on by the shareholder whose shares were purportedly bought back.
  • Any share issues since the purported buy back will not have been offered pre-emptively to the shareholder whose shares were purportedly bought back.

Moreover, where a buyback has not been conducted in accordance with the Act, the company and its directors will be guilty of an offence and liable to a prison term of up to two years or an unlimited fine or both.

It is vital that the share buyback procedure is complied with, to avoid any unintended consequences in future, particularly if the remaining shareholders are gearing up for an exit from the company.

For more information contact Nick Pickup in our Corporate department via email or phone on 0333 207 1132. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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