Share Buybacks – improvements in the law to benefit all SMEs

/ April 17th, 2013 / Comments Off on Share Buybacks – improvements in the law to benefit all SMEs

One of the big upcoming changes to company law is a simplification of the rules governing how a company can buy back shares it has issued and how it can hold these shares as what are called “treasury” shares.

The aim of this change is to encourage companies that are not quoted to offer equity (shares) to employees by making it more straightforward for the company to buy back shares, hopefully heralding an increase in employee share schemes.  Why has the government promoted these changes you may ask?   I suspect the reason is to draw in my cash for the exchequer as surveys show that companies with employee share schemes do better than those without.  It is believed that the changes will be available to all private companies and not targeted to specific industries such as hi tech businesses as has been the case in the past.

At present, when the shares in a company are bought back from a shareholder, the shares are described as “cancelled”, which means that they no longer exist.  For example, if a company consists of 50 shares, and 5 shares are subject to a “buyback”, the number of shares of that company will be reduced to 45 shares.

To be sure that the buyback provision is not abused, share buybacks are subject to certain restrictions, including:

  • a special resolution is required, meaning that 75% of shareholders must vote in favour of the buyback
  • the shares must be funded straightaway in cash
  • each individual buyback requires a new shareholder special resolution
  • in order to buy the shares back, the general rule is that a company must have distributable reserves (although it may also be possible to pay for the shares from the proceeds of a fresh issue of shares made to finance the buyback, or out of capital).

The changes to UK company law are intended to simplify the process where the shares are being bought back under a share scheme for employees. The headline changes proposed are as follows

  • share buy-backs will no longer have to be paid for immediately for cash. Instead, the buy-backs can be purchased in installments
  • only an ordinary shareholder resolution is required, needing a straightforward majority (50% + 1)
  • a number of buybacks can be approved in a single resolution of the shareholders
  • it will be possible for a company to fund the buyback even if distributable reserves are not available (up to an annual cap of the lower of £15,000 or 5% of the value of the share capital).

Each of the above changes should make it more straightforward for a company to buy back shares it has issued to an employee who is leaving the company.

The change to treasury shares will also encourage employee share schemes. At present, only public companies (PLCs or other listed companies) are permitted to retain any shares the company has bought in a buyback of shares. These public companies do not have to cancel the shares.  These kept shares may instead be held as treasury shares and can be sold or given to other shareholders in the future.

For employee shares, companies may not want to cancel the shares it has bought back.  When shares are cancelled, those shares no longer exist. This affects the percentage ownership of all other shares held in the company, as the number of shares in issue is changed.  It also makes it harder to keep shares available to award to other employees.  For this reason, some companies owned by employee s utilize an employee benefit trust to purchase the shares.  This is a complicated structure, and the changes proposed to treasury shares will make this much more straightforward for employee shares.  Private companies will now be able to hold treasury shares, which was previously an option only open to public companies. The proposed changes allow a company to purchase back the shares but not cancel those shares.

 

The legislation should be another step towards encouraging wider employee share ownership.

 

These changes are set out in the proposed Companies Act 2006 (Amendment of Part 18) Regulations 2013, which are currently before parliament and should come into force on 30 April 2013.

http://www.legislation.gov.uk/ukdsi/2013/9780111537145

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