A share buyback is a mechanism whereby a company purchases its own shares, either out of distributable profits, the proceeds of a fresh issue of shares or (subject to certain safeguards) out of capital. For a private company, they are typically used to return surplus cash to shareholders, or to provide an exit route for a retiring shareholder. For listed companies, they can be used to increase earnings per share or enhance liquidity.
A share buyback out of distributable profits, or the proceeds of a fresh issue of shares will require prior shareholder approval of a share buyback contract; a share buyback out of capital will additionally require a directors’ report as to the solvency of the company, backed up by an auditor’s report, and public advertisement of the buyback, to allow creditors time to object.
It is very important to ensure that a share buyback is done exactly in accordance with the legislation, as failure to comply will render the share buyback void, which means the recipient of the cash for the shares will be liable to repay it to the company.
Reductions of Capital
The Companies Act 2006 allows a company to reduce its share capital “in any way”. In particular, a company can:
- Extinguish or reduce the liability on any of its shares in respect of share capital not paid up.
- Cancel any paid-up share capital that is lost, or not represented by available assets.
- Repay any paid-up share capital in excess of the company's needs.
A company can reduce the number of its shares in issue, the nominal value of those shares, or the amount paid-up (e.g. share premium) on those shares.
A reduction of capital is typically used to:
- Create distributable reserves (which can be used to pay a dividend or to buy back or redeem its own shares);
- Reduce or eliminate accumulated realised losses in order to be able to pay dividends in the future; or
- Return surplus capital to shareholders (although for a private company this would more often be done by way of a share buyback).
Prior to the Companies Act 2006, the only way to effect a capital reduction was by seeking shareholder approval and then the approval of the Court. At the Court hearing the company’s creditors would have the right to object to the reduction and the Court would have discretion to approve or reject the reduction.
Since late 2008 private companies have had the power to effect a capital reduction without Court approval via the “solvency statement” procedure, which involves the Directors making a formal statement as to the future solvency of the business, which is then filed at Companies House. Provided the requirements of the Companies Act 2006 are followed, creditors have no right to object to a capital reduction using the solvency statement procedure. Directors should be aware that making a solvency statement recklessly is an offence, so this is not a procedure to be taken lightly and without good legal and accounting advice.
We would be happy to assist with all aspects of a capital reduction, having experience of both the Court and solvency statement procedure.