This guide focuses on public companies and explains why they might consider buying back their own shares, and outlines below considerations and steps that public companies would need to navigate to undertake a share buy-back.
MSP Company Secretarial can support and guide you through the necessary steps that are relevant to undertaking a share buy-back.
Contact us today to find out more.
What is a Share Buy-Back?
In essence, a share buy-back is a purchase by a company of its own shares from a shareholder. Chapter 4 of Part 18 of the Companies Act 2006 sets out numerous requirements and formalities for companies wishing to undertake a share buyback.
The Companies Act 2006 (“the Act”) generally prohibits companies from acquiring their own shares, however, share buy-backs provide an effective exception to this rule and a convenient mechanism for companies to purchase their own shares.
What are the Reasons for a Company Share Buy-Back?
The common reason for a company wanting to repurchase its own shares is to return surplus capital to shareholders and optimise the balance sheet, particularly where companies have enjoyed a period of enhanced profitability or undertaken a sale of a business or significant assets which has improved its financial position. Public companies whose shares are traded on the Main Market or AIM would consider carrying out a share buy-back to improve important financial measures such as earnings per share (EPS) and price to earnings ratio (P/E ratio), and improve the liquidity of its shares in the market, making them more attractive for investors. A share buy-back can also be used to facilitate the exit of an outgoing shareholder from a company, for example, to purchase shares issued to an employee under an employee incentive scheme when they cease to be employed by the company.
What follows in the outline below is an overview of off-market and market purchases, both the types of resolution and shareholder authority that is required to implement a share buy-back, and practical considerations and next steps for companies to consider.
Off-market Purchase of Shares vs Market Purchases
The Act provides that shares must be repurchased using either an off-market or an on-market buy-back. The distinction between these two types of buy-backs is:
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Off-market Purchase of Shares:
This is used to purchase shares that are not on a recognised investment exchange as recognised by the Financial Services and Markets Act 2000 (e.g., the London Stock Exchange), or shares that are purchased on a recognised exchange but are not subject to a marketing arrangement on the exchange (Section 693 of the Act).
Companies may only make an off-market purchase of their own shares under a contract that is approved before the purchase. However, there is an exception to this, where the purchase is for the purposes of, or according to, an employees’ share scheme. Instead of a contract, the share buy-back would be made under a general authority given by the shareholders in a general meeting.
A copy of the share buy-back contract must be made available to members for inspection. The contract should also set out the main terms of the buy-back and include information such as (i) Name of selling shareholder(s); (ii) Number and class of shares being sold; (iii) price to be paid for the shares or a price range or formula to establish the price.
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Market Purchase of Shares:
Shares are purchased on a recognised investment exchange, other than an overseas exchange (Section 701 of the Act). Often, listed and quoted companies will usually carry out a market purchase buy-back through an on-market buy-back programme.
For market purchases, the maximum and minimum prices to be paid for a buy-back of shares must be specified in the shareholder resolution approving the market purchase (Section 701(3)(b) of the Act).
For companies that have a listing as a commercial company, the maximum price which can be paid for equity shares bought under a general authority to make market purchases is the higher of:
- 5% above the average market value of the company’s equity shares for the five business days before the day the purchase is made; and
- The price set out in the technical standards stipulated by Article 5(6) of UK Market Abuse Regulations (UK MAR).
Shareholder Resolutions for the Purchase of Own Shares by a Company
Both off-market purchase and market purchase of shares would require shareholder approval through a resolution.
For both purchases, the type of resolution required is not specified by Section 642(3) and Section 701(1) of the Act. An ordinary resolution of the shareholders will be sufficient, unless the company’s Articles of Association require a higher majority or unanimity. However, the Investment Association’s Share Capital Management Guidelines sets out that, “… Companies should seek authority to purchase their own shares whether on market or off market by special resolution and not simply an ordinary resolution as is allowed by Sections 694 and 701 of the Companies Act 2006…..A general authority to purchase shares should be renewed annually”. * Special resolutions are market practice for companies that are listed on either the Main Market or AIM.
A special resolution authorising an off-market share buyback contract and any resolution authorising market purchases must be filed with Companies House within 15 days of being passed.
* The Investment Association Share Capital Management Guidelines February 2023
Other Practical Considerations Relating to the Company Buy-Back of Shares
There are several practical considerations for companies considering undertaking a company share buy-back:
- The Articles of Association must not restrict or prohibit the company from purchasing its own shares. Where the Articles restrict or prohibit buy-backs, it should be possible to remove any restriction or prohibition by passing a special resolution. A copy of the new articles must also be filed at Companies House within 15 days of being passed.
- How will the share purchase be funded? It is important to note that companies may only purchase their own shares out of distributable profits and/or the proceeds of the issue of shares made for the purpose of financing the purchase. Section 691(1) of the Act provides that shares can only be purchased if they are fully paid. Additionally, payment for the shares must be made in full, in cash, on completion.
- Following a buy-back, the purchased shares either must be cancelled and the amount of the company’s issued share capital diminished by the nominal value of the cancelled shares or (Section 706 of the Act).
Relating to Off-market Buy-back Contracts or Market Purchases
Resolutions seeking shareholder authority to make an off-market share buy-back would need to specify the date on which it is to expire, which must not be more than five years from the date that such resolution is passed.
Additionally, the authority for a market purchase must address: (i) whether the authority being sought is general or limited to the purchase of shares of a particular class or description; (ii) unconditional or subject to conditions; (iii) the maximum number of shares authorised to be acquired; (iv) both the maximum and minimum purchase prices that may be paid for the shares.
Once a resolution to approve the authority for either an off-market purchase or market purchase has been passed by shareholders, the authority can be varied, revoked or renewed.
MSP Company Secretarial can undertake a review of your articles of association to ensure they do not restrict or prohibit the company from purchasing its own shares and draft the necessary shareholder resolutions seeking authority to make either an off-market buy-back resolution or market purchases.
Shareholder Meetings
Public companies would always need to call a general meeting to obtain the required approval for a share buyback, though commonly publicly listed and AIM companies would seek general approval for market purchases at their AGMs.
For information on how to prepare and conduct an AGM and how MSP Company Secretarial can assist you, please see the related topics at the bottom of this article.
Employee Share Schemes
Section 693A of the Act allows for a public company to pass an ordinary resolution to grant a general authority under which it can carry out multiple off-market buy-backs for the purposes of, or pursuant to, an employees’ share scheme. The authority by a resolution under this section closely follows the requirements detailed above, and provides the authority:
- May be general or limited to the purchase of shares of a particular class or description.
- May be unconditional or subject to conditions.
- Must specify the maximum number of shares authorised to be acquired.
- Must determine the maximum and minimum purchase prices that may be paid for the shares.
- May be varied, revoked or renewed by a resolution of the company.
- Must specify the date the authority is to expire, which must not be later than five years after the date on which the resolution is passed.
Tender Offers to Effect Share Buy-backs
Provided a general authority has been obtained from shareholders, companies with a listing as a commercial company intending to buy back 15% or more of any class of its shares would need to buy back the shares by way of tender offer to all shareholders. Note, however, that share buy-backs which have been specifically approved by shareholders do not count towards the 15% threshold (UKLR 9.6.3R).
Implementation of a Share Buy-back for General Market Purchases
A public company with a listing as a commercial company that has sought general authority to make market purchases is required to:
- Make a market announcement as to the details of any buy-back programme and include information such as the maximum amount that can be paid for shares purchased pursuant to the market purchase programme, the maximum number of shares that can be purchased and duration of the programme.
- Where a company has stated there is no current intention to use the authority to make market purchases and then subsequently decides it will use the authority, a market announcement should be made to notify of a change of intention.
The timing for carrying out market purchases would need to be considered in line with the requirements of the UK Market Abuse Regulations and a company’s closed period, and restrictions contained in a company’s share dealing policy.
In the case of a company with a listing as a commercial company, note that timely notifications required under the Listing Rules and Disclosure and Transparency Rules should be made whenever shares have been bought back. Notifications should set out the date of purchase of the shares, the number of shares purchased, the highest and lowest prices paid and whether the shares are to be cancelled or held in treasury. A company will need to announce at the end of any month during which it buys back its shares and, if a material decrease in the total number of voting rights occurs as a result of the buyback, as soon as possible after the buy-back.
Post-Share Buy-back Considerations
Shares that are bought back by a public company and are subsequently cancelled or held in treasury require various filings to be made at Companies House. Also, company records are required to be updated, and stamp duty may need to be paid to HM Revenue & Customs.
MSP Company Secretarial can support and guide you through the regulatory requirements that are needed to implement a share buyback.
How MSP Company Secretarial Can Help
MSP Company Secretarial is experienced in helping PLCs with all stages of the process to carry out a share buy-back and holding general meetings. We can support with:
- Preparations for AGMs and general meetings of shareholders.
- Assist with all relevant statutory filings and liaising with a company’s share registrar, as required.
- RNS announcements required.
- Preparing board and shareholder resolutions.
Contact us today for more information.
Share Buybacks: Frequently Asked Questions
Are Share Buy-Backs Available to Both Private and Public Companies?
Yes, however private companies may also finance a share buy-back out of capital which is not available to public companies. This would be subject to any restriction or prohibition in the company’s articles. A private company may also hold buy-back shares in treasury if they were purchased out of distributable profits.
What Happens if a Company Fails to Purchase Shares?
If a company agrees to buy back any of its shares but fails to do so, the company is not liable in damages in respect of that failure under Section 735(2) of the Act. Where a company is being wound up and any shares subject to a buy-back have not been purchased at the commencement of the winding up, the terms of purchase may be enforced against the company and the shares, once purchased, are treated as cancelled.
What would be the Consequences if the Requirements under the Act for implementing a Share Buy-Back have not been complied with?
There are levels of complexity to carrying out a share buy-back. Failure to comply with the requirements under the Act will result in the acquisition being void and may lead to the directors of the company breaching their statutory and common law duties.
What Are the Differences Between a Share Buy-Back and a Reduction Of Capital?
The main difference is that a share buy-back seeks to return surplus cash to shareholders, whereas a reduction of capital reduces the amount of its share capital. However, both routes allow a company to return surplus capital to shareholders. A reduction of capital also allows a company to reduce either the number of its shares in issue, the nominal value of those shares, or the share premium on those shares. The steps to be followed are different and require a special resolution by shareholders and, often, court confirmation (available to both private and public companies) or a solvency statement (available only to private companies).
What is the 5 Year Rule for a Share Buy-Back?
A resolution of a public company approving a share buyback must specify an expiry date from the date the resolution is passed. For off-market and market purchases, the expiry date cannot be later than five years from the passing of the resolution.
What are the Disadvantages of a Share Buy-Back?
There are tax considerations for companies to consider, as a share buy-back may likely need clearance from HMRC to agree the tax implications in advance. There is also an opportunity cost for companies, as excess cash could be used for future investments, such as mergers and acquisitions or research and development that may increase shareholder value.