Share Buybacks - Proceed with caution!

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26 November, 2020

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

A private limited company can make use of a mechanism under the Companies Act 2006 (the "Act") to buy back its own shares 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 or even misunderstood. Some of the most common areas of non-compliance 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 its accounts to ensure that there are sufficient distributable profits available to enable the buyback.

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

This failure to comply is the most common feature of an incorrectly implemented buyback. 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 funds available at completion to fund the buyback, it can still effect the buyback but in tranches rather than in one transaction. However, this requires there are sufficient distributable profits at each stage. However, the delay and uncertainty that this brings may not be an attractive 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 a 51% majority of all voting shares held by the members other than the shareholder whose shares it is proposed 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 meaning 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 prospective purchaser of the company in the future may be apprehesive if it cannot be deterined
  • 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.

Next Steps

If you are thinking of undertaking a buy back of shares in your company or alternatively, think your company may have been involved in a defective buyback.

For more information contact Nick Hodgson in our Corporate department via email or phone on 0333 207 1139. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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