A share buyback is a purchase by a company of its own shares from shareholders. The shares “bought back” are then effectively cancelled.

A limited company is only permitted to purchase its own shares in accordance with Part 18 of the Companies Act 2006 (the “CA 2006”). Part 18 of the CA 2006 must be strictly followed to ensure that any buyback is valid.

Types of Share Buybacks

Under the CA 2006, shares must either be repurchased pursuant to an ‘off-market’, or ‘on-market’ buyback. In general, off-market purchases are available to both private and public limited companies but only certain public companies are able to make market purchases. This blog focuses on off-market buybacks.

A buyback is deemed off-market if the shares are not purchased on a recognised investment exchange, such as the London Stock Exchange; or if the shares are purchased on a recognised investment exchange, they are not subject to a marketing arrangement on the exchange.

Funding Share Buybacks

 A share buyback can be funded by any of the following means:

• Distributable profits;
• Capital; or
• A new issue of shares.

How the buyback is financed will determine the procedure to be followed to carry out the buyback. However, if the company does not have the cash available to pay for the shares, the company cannot buy back the shares. The most usual way to fund a share buyback is using the company’s distributable profits.

Requirements for Share Buybacks

Part 18 of the CA 2006 governs buybacks and notably there should be:

• A buyback contract: an agreement between the company and the shareholders whose shares are to be purchased, documenting the key steps and ultimately, giving permission for the company to purchase the shares at that time or in the future.
• Shareholder approval: The buyback contract must be approved by an ordinary resolution of the eligible shareholders (i.e. those shareholders whose shares are not being proposed to be bought back).

Why would a Company do a Share Buyback?

There are numerous reasons as to why a company would want to buy back its own shares but you might consider it for any of the following reasons:

• To return surplus cash to shareholders: Shareholders demand a return on their investment, and buying back some or all of the outstanding shares can be a simple way to pay off investors and reduce the overall cost of capital.
• Providing an exit route for shareholders: A company can purchase the shareholders’ shares in order for them to exit the company.

If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Sarah Ward, one of our Corporate partners, on 07889 589596 or e-mail Sarah at sward@georgegreen.co.uk for advice and assistance.