Don’t let a share buy back bite back

Corporate and Commercial / 21 August 2017

In some circumstances the best purchaser of shares in a private company is the company itself. This generally arises to allow a shareholder to exit the business, to reduce the company’s share capital, to return cash to its shareholders or to increase the value of its shares. Whatever the motivation behind the transaction, the company must adhere to company law requirements; if not, the transaction will be void.

If a transaction is void, it is treated as having not taken place. Any shares purchased under a void transaction remain the property of the transferee member, and any consideration paid for the shares must be paid back to the company.

Void transactions can raise serious practical difficulties such as, what if a shareholder cannot afford to repay the consideration, what if the company’s value has significantly reduced and what if the transaction cannot be redone because the company does not have sufficient distributable reserves?

Being clear on the requirements is crucial to prevent these undesirable consequences.

  • The company’s constitution must be amended where it prohibits or restricts an own share purchase and where there are other requirements or restrictions that might need to be waived or amended.
  • The company must obtain the necessary authority from the company’s members in advance.
  • The company and the seller of the shares must enter into a contract.
  • The shares must be fully paid at the point they are purchased, unless the shares are bought back in relation to an employees’ share scheme.
  • The consideration must come from the company’s distributable reserves, a fresh issue of shares, capital (subject to further stringent requirements), or cash (subject to certain conditions being satisfied around the level of consideration).

We would strongly advise that you seek legal advice when considering a share buy back transaction, and this is something we can assist you with.

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