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In April 2013, significant changes were introduced to the rules governing a purchase by a company of its own shares. The buyback regime was simplified, particularly for share purchases made in connection with an employees' share scheme, in response to the Nuttall Review of Employee Ownership. However, a number of uncertainties arose in relation to the new rules and further changes to the regime came into force on 6 April 2015, which are intended to ensure that the regime operates effectively.
One of the changes made in 2013 related to the funding of small share buybacks by private companies. The general rule is that a share buyback must be funded out of distributable profits or the proceeds of a fresh issue of shares, but a private company may buy shares back out of capital if additional statutory requirements are met, including: specific shareholder approval for the capital payment given by special resolution; a directors' solvency statement supported by an auditor's report; and publicity about the proposed payment in the London Gazette. There are also timing restrictions which require a payment out of capital to be made between five and seven weeks after the special resolution approving it.
In 2013, an additional provision was included which meant that private companies could, if authorised to do so by their articles, make small buybacks without worrying whether they had distributable profits and without complying with the additional requirements for a buyback out of capital. This provision applies to buybacks up to an amount in a financial year which is equal to or less than £15000 or, if lower, 5% of the company's share capital.
The recent changes clarify:
- that the "amount" referred to is the aggregate purchase price of buybacks made in the financial year
- that the 5% limit relates to the nominal value of the company's share capital (excluding any share premium) and is calculated by reference to its share capital at the beginning of the relevant financial year
When this small buyback provision was first introduced, the accounting consequences were not spelt out. It is now clear that such a buyback is treated as a buyback out of capital.
Following the 2013 changes, private companies need not immediately cancel shares they have bought back, but may hold them in treasury before selling them, transferring them pursuant to an employees' share scheme or cancelling them. However, this does not apply if the shares were bought back out of capital or the proceeds of a new share issue, rather than distributable profits. Although the 2013 changes provided that shares could be held in treasury if they were bought back under the new small buyback provision, this option has now been removed.
For share buybacks made in connection with an employees' share scheme, the changes introduced in 2013 included a simplified regime for shares to be bought back out of capital. This involves a different solvency statement by the directors and no requirement for an auditor's report or publicity in the London Gazette. In relation to timing, the requirement was that the payment out of capital had to be made between five and seven weeks after the date on which the bought back shares were surrendered.
One of the other changes made in 2013 was to remove the requirement for bought back shares to be paid for on purchase, allowing payment for shares bought back in connection with an employees' share scheme to be deferred, or to be made in instalments, if the selling shareholder agreed.
However, the timing requirement meant that companies using the simplified regime for a buyback out of capital were not able to take advantage of this option for deferred payment. This has now been rectified.
The timing requirement does not now relate to the timing of the capital payment, but is for the shares to be surrendered between five and seven weeks after the special resolution approving the capital payment.
The new provisions also remove a requirement for two identical statements of capital to be filed at Companies House when shares are bought back out of capital in connection with an employees' share scheme and on the cancellation of those shares.
Danielle Harris is a Senior Associate and Professional Support Lawyer in Fieldfisher's Corporate Group in London.
This article is based on an article written for Company Secretary's Review, published by LexisNexis.