Share buybacks: An overview

Share buybacks are a useful tool to public and private companies. However, the procedure can be complex, and the courts have been known to scrutinise deviations of any sought. In the most extreme cases, share buybacks have been unwound leaving the shares still in issue and in control of the shareholder.  

Repurchasing shares can be an effective solution in a variety of commercial situations: from wanting to return surplus cash to existing shareholders, to needing to increase a company’s net assets per share. With ever increasing popularity however, more companies are using the share buybacks procedure to provide an exit route for shareholders. In particular, renewed interest in employee share incentives and schemes have increased the procedure’s popularity.  

Updates to the Companies Act 2006 (CA), and a number of subsequent amendment regulations, have accelerated its use as a means of shareholder exit by modernising and streamlining the share buybacks procedure. Significant changes included a removal of the need for specific repurchase authorisation to be contained in a company’s articles. Whilst this is no longer a requirement, s.690(1) of the CA does state that permission for a company to repurchase its own shares can still be prohibited or restricted by a corresponding provision in any Articles of Association.  

Secondly, a buyback contract can be entered into before the resolution approving the share buybacks has actually been passed by the company’s shareholders (although this must be a conditional requirement). Finally, and arguably most significantly, the 2013 Amendment to the CA included provisions that allow small cash buybacks out of capital (up to a maximum of £15,000) without the company needing to be concerned as to whether the purchase was made out of distributable profits (a requirement under the previous Companies Act 1985).  

This change, alongside the downgrading of approval of a share buybacks agreement from special resolution (approval by 75% of Shareholders) to ordinary resolution (approval by majority of shareholders), has greatly widened the scope of the procedures applicability and accessibility in allowing smaller companies to ‘fast-track’ the process.   

As mentioned above, case law suggests that any deviation from the prescribed procedure will be scrutinised. This was particularly evident in the recent Court of Appeal decision in Dickinson v NAL Realisations (Staffordshire) Ltd. [2019] (‘Dickinson’). In Dickinson, the key point of contention was whether or not s.691 of the CA had been complied with; in short, whether or not the shares had been paid for.  

S.691(2) of CA states: 

“Where a limited company purchases its own shares, the shares must be paid for on purchase….” 

In Dickinson, the company’s purchase of its own shares from the managing director were purchased via loan arrangements entered into after the buyback agreement had completed. The court held that the requirement for consideration was therefore not satisfied at the time and that acknowledging the debt by entering into a loan agreement did not constitute ‘paid for on purchase’.. The Court of Appeal held the purchase of the shares to be void.  

The decision in Dickinson highlights just one of the key considerations regarding the share buybacks process. Other crucial considerations include: 

• Checking the Articles to see if a buyback prohibition or restriction exists. 

• Deciding whether to make a market or off-market purchase. 
• If the shares are part of an employee share scheme, the Buyback Regulations 2013 allow for a less arduous process. 
• Drafting the buyback contract, this will differ on whether there are single or multiple completions. A company may need to consider whether additional provisions need to be included in the event the company is sold and the price per share changes. 
• Deciding on the appropriate manner in which to finance the buyback. In the absence of distributable profits as company may finance the transaction through capital. Furthermore, where the value of the buyback is less than £15,000 the company may be able to rely on the de-minims principle and therefore follow a swifter route. 

The decision in Dickinson highlights just one of the key considerations regarding the share-buyback process. Other crucial considerations include: 

• Checking the Articles to see if a buyback prohibition or restriction exists. 

• Deciding whether to make a market or off-market purchase. 
• If the shares are part of an employee share scheme, the Buyback Regulations 2013 allow for a less arduous process. 
• Drafting the buyback contract, this will differ on whether there are single or multiple completions. A company may need to consider whether additional provisions need to be included in the event the company is sold and the price per share changes. 
• Deciding on the appropriate manner in which to finance the buyback. In the absence of distributable profits as company may finance the transaction through capital. Furthermore, where the value of the buyback is less than £15,000 the company may be able to rely on the de-minims principle and therefore follow a swifter route.