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Share buybacks and what to do when they are void!

What is a share buyback?

A share buyback is when a company purchases its own shares from a shareholder. However, for a limited company to successfully purchase its own shares, it must comply with Part 18 of the Companies Act (CA) 2006.

Part 18 states that:

  • shares must be repurchased either on or off-market;
  • shareholder approval must be sought;
  • the company may not purchase its own shares unless they are fully paid;
  • the shares must be paid in cash at the time of purchase;
  • shares may only be financed out of distributable profits of the company, or the proceeds of a fresh issue of shares made for the purpose of financing the purchase. Alternatively, for a private limited company, shares can be purchased out of capital; and
  • after repurchase, the shares must be cancelled or, if financed out of distributable profits, can be held in treasury.

Why undertake a share buyback?

The main reasons why a company decides to undertake a share buyback is to:

  • return surplus cash to shareholders
  • increase earnings per share
  • increase net assets per share
  • enhance share liquidity
  • increase gearing (otherwise known as the debt/equity ratio or leverage)

provide an exit method for shareholders

When is a share buyback void?

A share buyback will be void if a company carried out such transaction in breach of the CA 2006.  The Court has also held that a share buyback will be void where a company’s articles do not permit share buybacks.

If a share buyback is deemed void, the shares which were supposedly bought back by the company, will still remain in issue – it is as if the buyback had never occurred. Additionally, the company and every officer of the company who is in default, will be guilty of an offence which can lead to imprisonment or a fine.

Madeleine Harding

Trainee Solicitor

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+44 118 960 4693

The Court has also held that a share buyback will be void where a company’s articles do not permit share buybacks.

Can you rectify a defective share buyback?

One method that allows companies to rectify void share buybacks is through a statutory reduction of share capital.  The advantage of using this process is that if the defective buy back happened some time ago and the original shareholder cannot be located or is unwilling to participate in a new buyback, then pursuant to S112 of the CA 2006, because they have been removed from the register of members, they are not entitled to receive notice of or vote on the special resolution required to cancel the shares.  Consequently, as long as the board can make a statement of solvency on behalf of the company in the prescribed form, the share can be cancelled.

It is also possible to rectify a defective buy back through an application to court, or in the case of a public company, which cannot rely on the reduction of capital method above, the most common way.  The court will only confirm a reduction of share capital where it is satisfied that the interests of the company’s creditors will not be adversely affected.

The process of a buy back is largely procedural.  Recent case law has clarified the position on timings of payments and what is meant by “paying for the shares”.  Clearly, getting the process right first time avoids the needs for the difficulty around rectification.  If you are considering a buy back or need help rectifying one, please do not hesitate to get in touch with the corporate team.

About this article

Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

Madeleine Harding

Trainee Solicitor

View profile

+44 118 960 4693

About this article

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