Buyback of shares is a convenient way for a company to return cash to shareholders. Under a share buyback the company acquires shares in itself from existing shareholders. The shares are then (generally) cancelled and the issued share capital of the company is reduced accordingly.
This article describes the process to be followed for private companies wishing to carry out a buyback of shares out of distributable reserves.
In certain circumstances private companies can also carry out share buybacks out of capital, where they have exhausted available reserves. However, a buyback out of capital requires the directors to swear a declaration of solvency and also requires notice to be given to creditors in the press and is therefore more complex and lengthy.
It is important that a share buyback is carried out using the correct procedure under the Companies Acts as failure to comply with the specific requirements can lead to the buyback being declared invalid and, potentially, fines on directors. Broadly, the procedure to follow includes:
- Checking the company's constitutional documents to ensure that there is no specific prohibition or restriction contained in them with respect to share buybacks;
- Confirming that the shares being bought back are in issue as fully paid;
- Confirming that the company has adequate distributable reserves out of which to fund the share buyback i.e. those profits that could be used for the purposes of paying a dividend (for the purposes of confirming this aspect the directors of the company will normally seek comfort in the latest audited accounts but it is often advisable to rely on more up to date accounts);
- Preparing a contract to document the share buyback (which must be approved by the shareholders of the company by special resolution prior to completion of the buyback);
- Holding a board meeting of the company to consider the buyback, minute that there are adequate distributable reserves, approve the submission of the buyback contract to the shareholders for approval and authorising the company to execute the contract once the shareholders have approved it;
- Completing the buyback contract; and
- Dealing with certain filing issues, paying stamp duty (at 0.5% of the consideration) and updating the statutory books of the company.
It should be noted that the company must pay in full for the shares being bought back and this can sometimes prove an issue for companies from a cash flow perspective. If that is the case then the company may need to buy the shares back in instalments over a period of time.
We can help you
We can assist a private company wishing to carry out a share buyback out of distributable reserves by guiding a company through the procedures and preparing the appropriate documentation outlined above. We are also able to advise private companies on the procedures and documentation required for buybacks out of capital.
For further information regarding this article, please contact Daniel McCormack.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.
- Business Sales and Employees
- Buying Or Selling A Business Or Company
- Buyback Of Shares
- Completion Accounts
- Confidentiality Agreements (Or Non-Disclosure Agreements) For Acquisitions
- Disclosure Letters
- Due Diligence
- How Should A Management Team Start Negotiations?
- Locked Box Or Completion Accounts
- Share v. Asset Sale
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