Share Buybacks Explained

Share Buybacks Explained

A share buyback is where a company buys shares back from one of its shareholders. This can be an effective method for a shareholder to exit the business and provides an alternative to selling shares to a third party or other shareholders. However, it can cause significant difficulties if not implemented correctly.

Below, we explain how share buybacks work, their benefits and what legal steps are involved.

What are the Benefits of a Share Buyback?

  • Simplifies succession: Rather than finding a third-party buyer or expecting the other shareholders to fund the purchase, this uses the company’s resources to buy the shareholder out.

  • What happens to the shares once they're bought back? The shares are generally cancelled which increases the remaining shareholders’ ownership in the business proportionately. However, the shares can be held in treasury and ear-marked for new shareholders, such as employees to be incentivised.

How Does the Company Pay for the Shares?

  • Most buybacks are funded from distributable profits (profits that could be paid as dividends).

  • Alternatively, the company can issue new shares to raise the funds.

  • Buying back shares using capital is possible, but more complex and not discussed in this article.

When Does Payment Need to be Made?

  • The simple answer is that full payment for the shares must be made at the time of completion. This is a key requirement of company law.

  • It is possible to have a series of buybacks over time. However, this is not often recommended. The company would need sufficient profits at the date of each buyback and the seller would continue to hold the shares not yet bought back in the interim period.

  • Instead, if the company would like to explore making payment over time then a share-for-share exchange could perhaps be considered as an option.

What Documents Are Involved?

  • The company’s constitution (articles of association, shareholder agreements etc.) should be checked to make sure buybacks are not prohibited.

  • A written buyback agreement is required, and generally it must be approved by an ordinary resolution (more than 50%) of the voting shareholders (not including the seller). A formal process must be followed if this is to be approved at a general meeting.

  • Companies House Form SH03 is used to transfer the shares. It is this document on which Stamp Duty is paid by the company.

  • Companies House Form SH06 is used to cancel the shares (if applicable).

  • The seller may want the company’s/their accountant to seek HMRC clearance at the outset of the transaction as part of their tax planning as it may be possible for the payment to qualify for capital gains tax treatment.

What Are the Risks of Getting It Wrong?

Share buybacks have strict company law requirements. Failure to comply can:

  • Result in the buyback being void (meaning that the shares remain legally held by the seller). This may:

    • Mean shareholder decisions are not validly passed and/or dividends are paid incorrectly.

    • Seriously delay a future sale of the company or even cause that sale to fall through.

  • Cause an offence to be committed by the company and its directors.

  • Cause problems with seller’s tax treatment.

Why Expert Advice Is Recommended

Given the strict company law surrounding share buybacks, small mistakes can have big repercussions. By involving a specialist corporate solicitor we can help document and implement your share buyback correctly and avoid surprises in the future.

At Lawson West Solicitors, we work closely with you and your accountant to ensure that your share buyback is correctly structured. We provide clear, practical advice tailored to your business and objectives, giving you confidence and peace of mind throughout the process.

Please contact Rob Flannagan on 0116 212 1033 or email rflannagan@lawson-west.co.uk if you have any share buyback enquiries.

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