For businesses, a share buyback can be a strategic tool for restructuring or facilitating the exit of a shareholder.
What is a share buyback?
A share buyback is where a company purchases its own shares back from an existing shareholder. It allows the shareholder to exit the company and the company to then either cancel the shares or hold them in the treasury for future distribution.
The most common form of share buyback for a UK private limited company is an off-market share buyback out of distributable profits where the company uses its own cash to acquire the shares.
What are the benefits?
A share buyback can have a number of benefits when used as part of an exit strategy. Fundamentally, the remaining shareholders will not have to buy out the exiting shareholder when they may not have the capital to do so, or find a third party who is willing to buy the shares. The company will be able to use available profits to purchase the shares instead.
It is also neater. Once the shares are bought back, they may be cancelled, consolidating share ownership and increasing the value of the remaining shares in circulation. It also increases the remaining shareholders’ percentages proportionally as between one another so that the ownership structure is maintained. This can also be beneficial in a restructuring scenario.
In less contentious circumstances a share buyback may be used to simplify the ownership structure of a company, return cash to a shareholder or reduce surplus capital.
What is involved in a share buyback?
Share buybacks are governed by the Companies Act 2006 and the rules are prescriptive and complex. Failure to adhere to the rules can result in the buyback being void and the company (as well as its officers) being guilty of a criminal offence. It is important therefore, to seek proper legal and financial advice before carrying out a share buyback.
As well as adhering to the relevant requirements in the Companies Act 2006, a company will need to ensure its articles of association permit a share buyback. If permitted, the company will usually enter into a buyback agreement with the exiting shareholder and will need to obtain shareholder consent.
Summary
A share buyback can be a powerful tool for a company when used strategically, whether it is used to facilitate the exit of a shareholder, or as part of a restructure. If you would like to explore a share buyback in more detail, our team of specialist lawyers in our Corporate team is here to guide you through every step of the process. Please also refer to our Business Owners Disputes and Exit Strategies page for more information and support.