A share buyback is a purchase by a company of its own share capital from one or more of its shareholders. To complete an effective buyback, it is essential that the provisions of the Companies Act 2006 are strictly adhered to.

To comply with the Companies Act 2006, any shares being repurchased by way of a share buyback must be fully paid for in cash at the time of purchase; such cash is commonly financed out of a company’s distributable reserves. So, what happens if a company has insufficient distributable reserves?

It is possible to undertake a share buyback, whereby the beneficial title to such shares is transferred in advance of the legal title. In this instance, the share buyback agreement would be drafted in such a way as to accommodate for a split exchange and completion and, vitally, this structure still complies with the Companies Act 2006.

Structuring by way of a split exchange and completion is useful where either: -

1. a shareholder wishes to exit a company; or
2. a company wishes a shareholder to exit,

but that company does not hold sufficient distributable reserves to finance the entire amount of cash required to purchase the exiting shareholder’s shares. As mentioned above, the purchase price must be fully paid for in cash at the time of purchase, meaning that payment cannot be deferred, delayed, or paid in instalments following completion.

To comply with the Companies Act 2006, whilst ensuring the shareholder in question exits as soon as possible, the share buyback agreement is structured so as to transfer the beneficial title on exchange (i.e. the date of the agreement) and the legal title on completion, at a later date (i.e. the same date the purchase price is paid). However, the company must still ensure that it has, or will have, sufficient distributable reserves to satisfy the entire purchase price on the later completion date, so as to avoid breaching the share buyback agreement and facing the consequences that may accompany that. To safeguard against this risk, it would be prudent to draft the agreement so that completion becomes conditional on the company holding the necessary cash. Although, the tax implications of such provisions must be explored.

In addition to the above considerations, it is also important to remember that other key requirements of a share buyback transaction must still be satisfied in order for the transaction to be valid; i.e. obtaining the requisite shareholder approval and arranging for the effective cancellation of the repurchased shares.

If you or your business require information regarding anything covered in this blog or generally in relation to any other corporate matter, please call Jade Langford, a Solicitor in our Corporate Team, on 01384 340 504 or e-mail Jade at jlangford@georgegreen.co.uk for advice and assistance.