Share buybacks are very useful in allowing shareholders to leave a company without the other shareholders buying them out or causing an imbalance in the percentages held by the remaining shareholders. They should not come at any direct cost to the remaining shareholders. However, all too often, they do.
Getting the company share buyback process right from the beginning is important, as illustrated below. Our corporate experts can offer legal support to ensure that your share buyback is effective and remains valid.
Advantages
Since the company pays for the shares, pays for the advice and since the shares are cancelled at completion, buybacks are highly attractive. The seller may also benefit from the generous taxation available through business asset disposal relief.
Funding
The company must have sufficient distributable reserves to justify the purchase. Consequently, the distributable reserves available to fund dividends or returns of capital to the remaining shareholders will be reduced.
That is not to say that the company cannot borrow to fund the deal if it does not have the cash – it can. The company can also purchase out of capital if need be but the directors must swear, at the risk of personal liability if they are wrong, the company’s ability to pay its debts for the next year, supported by an auditor’s report.
Formalities
The company must comply with certain statutory formalities. These include:
- having no barriers in the articles (and complying with any that are there);
- obtaining the approval to the buyback from a majority of the remaining shareholders;
- having fully-paid shares;
- complying with some complex timing and filing requirements; and
- paying the full amount of the purchase price to the seller on the day of completion in cash.
The time-bomb of non-compliance
We find that 10-20% of buybacks are not compliant. This can be a major problem when the remaining shareholders come to sell.
Typically, sellers think they have exited a former shareholder and are outraged when the lawyers on the deal spot the failure and tell them that the law, depending on the type of non-compliance, will treat the exited shareholder as still owning those shares.
This happens far more often than it should. Sometimes the issue is as plain as there being no evidence of the compliance; often it is much worse. Usually the company stinted on legal advice on the buyback and has caused a much greater price to the remaining shareholders.
Solutions and advice
There are a range of options to cure the situation. We have not seen this issue yet stop a deal – but many have been delayed and made less valuable.
Three pieces of advice:
- if a seller, check whether this is a problem and take advice before a buyer spots it;
- if a buyer, check this before you invest too much time and cost in the deal; and
- if arranging for an exit by a buyback, take proper legal advice from lawyers experienced enough to make sure that the buyback is compliant.
How Moore Barlow can help you
Our corporate solicitors have a wealth of experience in share buybacks for UK-based companies. For more information about how our solicitors can help you with a share buyback, contact the Moore Barlow Corporate team today.
