There are numerous reasons why a company may wish to buy back its own shares, including returning surplus cash to shareholders, increasing earnings per share or providing an exit route for a retiring shareholder. Recent changes to the buyback regime are designed to make the associated requirements less burdensome, resulting in buybacks being a more appealing and practical option.
So what’s changed?
Previously, a share buyback had to be approved by a special resolution, requiring the approval of shareholders holding 75% of the company’s issued shares (ignoring those shares which are subject to the proposed buyback). Now, all share buybacks only require approval by ordinary resolution, requiring a simple majority of votes.
Cash consideration not distributable reserves
There have always been restrictions on the source of funds which a company can use to pay for a share buyback – generally, this had to come from a company’s distributable reserves. Now, a company can complete small purchases (up to whichever is the lower of £15,000 or 5% of share capital in each financial year) using cash which does not have to be identified as distributable reserves. This will make it easier for companies with accumulated losses to buy back small amounts of their shares, although a company may only take advantage of this relaxation if it first amends its articles to authorise buy backs in these circumstances.
Relaxations for employee share schemes
A number of changes have been made where a company is buying back shares in connection with an employee share scheme with the hope that this will encourage more companies to set up such schemes in the first place. Changes in this area include:
- a company can make multiple buybacks under a general shareholder authority given for this purpose, rather than having to authorise each individual purchase in advance which was time-consuming and burdensome
- a private company can pay the buyback consideration in instalments, rather than having to pay it all on completion; and
- a more streamlined regime has been introduced for a private company funding a buyback out of capital so this can be done simply by a special resolution supported by a directors’ solvency statement rather than requiring a formal directors’ statement and a separate auditor’s report.
Treasury shares regime extended
A further change affects what happens to shares once they’ve been bought back. Previously, when a private company bought back its own shares, the shares had to be cancelled and could not be held for re-use.
Now, any company (whether public or private) may hold shares which it has bought back ‘in treasury’ meaning those shares are available for reuse and so could be transferred for the purposes of an employee share scheme or sold for cash.
This change will be particularly useful for companies issuing shares as incentives to its employees. It will enable shares bought back from departing employees to be held in treasury before being reused to satisfy further options or awards granted to other employees. Previously, companies had to establish a separate employee benefit trust in order to retain their own shares in this way, resulting in higher costs and an increased administrative burden.
Don’t forget to check your articles
The changes made to the share buyback regime will certainly reduce some of the associated administrative burdens and formalities which previously hampered the use of that procedure. However, companies should still proceed with caution and ensure they are permitted to carry out a share buyback in the first place. Any provision in a company’s articles which restricts or prohibits a share buyback will first need to be removed or waived by special resolution.