How to Avoid Void Share Buyback Transactions under the Companies Act 2006
A share buyback is the process whereby a company purchases its own shares from a shareholder. Share buybacks are usually done to return surplus cash to shareholders or to provide an exit for certain shareholders.
To protect creditors there are very strict rules and formalities in the Companies Act 2006 which must be complied with. Failure to do so will result in the acquisition being void and an offense being committed by the company and every officer in default.
Several requirements are set out in the Companies Act 2006 which, if not correctly followed, may lead to a failed/void buyback including:
1. Restrictions in the company’s articles of association – it is essential to check that the company’s articles do not restrict or prohibit the purchase of its own shares. Although it is not mandatory for the articles to explicitly permit a buyback.
2. Shareholder approval of the buyback – a simple majority approval of shareholders by way of an ordinary resolution of all shareholders (excluding the shareholder whose shares are being bought back) is required for a buyback.
3. Requirement for a Contract/memorandum – a company may only make an off-market purchase of its own shares pursuant to a contract/memorandum that is approved prior to the purchase except for when the purchase is for the purposes of an employee share scheme.
It can be a simple agreement that sets out the main terms of the buyback including:
· Name of the selling shareholder
· Number and class of shares being sold
· Price to be paid for the shares or a price range or formula to establish the price.
4. The shares being purchased must be paid in full at completion – consideration for the share buyback must be paid in cash at the time of purchase, therefore deferred consideration for a buyback is not permitted.
There are alternative options in the event the company does not have the funds available at completion to fully fund the buyback such as undertaking the buyback in tranches. However, this option is undesirable if the selling shareholder is to be removed from the company immediately and additional Companies Act requirements have to be complied with as each tranche of shares is bought back.
5. The buyback must be financed out of distributable reserves or the proceeds of fresh issue of shares – the company must ensure that in order to effect the buyback there are sufficient distributable profits available, the absence of which, would render the buyback void.
6. Post-completion formalities not complied with – once the buyback has been completed, certain formalities must be completed. Stamp duty must be paid on the consideration and filings must be made to companies house (SH03, SH06, and a copy of the shareholder’s resolution authorising the buyback).
The above requirements are sometimes overlooked or mistakes are made by the Company or its advisers, and if a company purchases its own shares contrary to the requirements set out in Part 18 CA 2006 and the purported acquisition is void, this can have serious repercussions for the company, its directors and the shareholder who had his or her shares bought back may also be reinstated as a shareholder, and the accounting and legal position is a confused mess.
Additionally, any prospective buyer or investor in the company may be discouraged from any purchase or investment due to the proposed sellers not having full title to all the shares in the capital of the company.
It is really important that Companies that undertake buybacks are advised properly and that these advisers have the correct insurance in the event of giving negligent advice.
A void share buyback may be rectified, for example by:
(a) Cancelling the purportedly repurchased shares pursuant to a statutory reduction of capital
(b) Carrying out the share buyback again – depending on the situation and the company’s relationship with the exiting shareholder, this may present further problems.
Taking the correct steps without delay can save time and money in the long term and will prevent any future deals from being put at risk.