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08th May 2013

Simpler Process for Share Buy-backs

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On 30 April 2013 new regulations (the Companies Act 2006 (Amendment of Part 18) Regulations 2013 (SI 2013/999)) ("the Buyback Regulations 2013") came into force.

They address issues raised in the Nuttall Review on Employee Ownership (a copy of which can be found here) and the subsequent Department for Business, Innovation and Skills' consultation; namely that the previous regulations were too burdensome, particularly for private companies wanting to facilitate employee ownership.

The aim of the Buyback Regulations 2013 is therefore to simplify the buy-back process for private limited companies; particularly in relation to buy-backs connected with employees' share schemes. It will now be easier for such companies to authorise and finance the buy-back of shares.

So, what does this mean in practice? The Buyback Regulations 2013 have different effect depending on the type of buy-back being entered into, specifically whether or not the buy-back is in relation to an employees' share scheme.

1. For all types of buy-backs:

1. a. You will no longer need distributable profits to finance small share buy-backs.

Private limited companies are, if authorised by their articles, now allowed to buy-back shares using small amounts of cash (not exceeding the lower of £15,000 or 5% of share capital in any financial year), whether or not it has sufficient distributable profits.

Previously, where a company did not have sufficient distributable profits it usually had to make the buy-back out of capital. This was subject to a rather cumbersome procedure: directors were required to undertake a full inquiry into the financial position of the company and, having done so, give a statement of solvency confirming that they were of the opinion that there will be no grounds on which the company could then be found unable to pay its debts and, for the year following the payment out of capital, the company will be able to continue to carry on business as a going concern (and will accordingly be able to pay its debts as they fall due). Additionally, companies were required to obtain an auditor's report in support of the directors' statement as well as obtaining further shareholder resolutions.

Under the Buyback Regulations 2013, however, provided the amount falls within the threshold figures, buy-backs are now permitted without the need to follow such procedure; only a shareholder resolution will now be required.

Crucially, a company must be authorised to do so by its articles, so consider reviewing and, if necessary, amending your articles in order to take advantage of this simplified process. This is a straightforward process involving the passing of a special resolution by the shareholders.

1. b. The process of obtaining shareholder approval is simpler.

The general rule is that before any contract for an off-market share buy-back is entered into, it must be approved by the company's shareholders. The Buyback Regulations 2013 have reduced the level of approval from a special resolution to an ordinary resolution. This means a simple majority of shareholders is now required to vote in favour of the buy-back, as opposed to three-quarters previously.

2. For buy-backs for the purposes of or pursuant to an employees' share scheme:

2. a. It is possible to obtain shareholder approval in advance.

For unquoted companies, the general rule was that a share buy-back required shareholder approval on a case by case basis. The Buyback Regulations 2013 now make it possible to pass an ordinary resolution to grant a general authority in advance, under which multiple buy-backs for the purposes of or pursuant to an employees' share scheme can take place.

2. b. Instalment payments are permitted where shares are bought back pursuant to an employees' share scheme.

Prior to the Buyback Regulations 2013, it was not possible to pay for shares bought by a company as part of a share buyback by deferred payments or instalments; shares had to be paid for at the time they were purchased. The Buyback Regulations 2013 have removed this restriction on purchases for the purposes of or pursuant to an employees' share scheme.

2. c. Simplified process for buy-backs our of capital.

Buy-backs of shares out of capital for the purposes of an employees' share scheme no longer need to follow the full procedure referred to in paragraph 1a above. In future, only a solvency statement of the directors and a special resolution of the shareholders will be required.

For more information, please contact Nich Hall on 01604 463375 or click here to email Nick