Equity Finance - Buyback of Shares

Question 1

What is the doctrine of maintenance of share capital?

Answer 1

It is a long-standing principle of company law that share capital must be preserved as a permanent fund available to creditors and cannot usually be returned to shareholders

Question 2

What are 2 key consequences of the capital maintenance principle?

Answer 2

• Dividends can only be paid out of distributable profits
• A company may not generally purchase its own shares, except via permitted procedures

Question 3

What is a buyback of shares?

Answer 3

A purchase by a company of its own issued shares from existing shareholders, commonly used when no external buyer is available.

Question 4

What types of companies may buy back their own shares?

Answer 4

Both private and public companies

Question 5

What are the 3 permitted funding sources for a share buyback?

Answer 5

1. Distributable profits
2. Proceeds of a fresh issued of shares
3. Capital (only if available to private companies)

Question 6

Can public companies use capital to fund a buyback?

Answer 6

No - only private companies can

Question 7

What conditions must be satisfied for all buybacks?

Answer 7

• The company’s Articles must not prohibit buybacks
• Shares must be fully paid
• The company must retain at least one non-redeemable, non-treasury share

Question 8

What is required for a buyback of shares out of profits or fresh issue?

Answer 8

• A contract for the buyback
• Approval of the contract by ordinary resolution

Question 9

How must the contract be made available to sharehodlers?

Answer 9

• At the registered office
• Circulated with written resolution, if that route is used

Question 10

What are the main procedural steps for a profit-funded buyback?

Answer 10

• Check Articles and verify distributable profits
• Confirm shares are fully paid
• Approve draft contract and call GM (or circulate written resolution)
• Shareholders pass ordinary resolution
• Directors sign and enter into contract
• File SH03, notice of cancellation, and statement of capital within 28 days
• Update register of members and PSC register
• Issue new share certificate and retain contract for 10 years

Question 11

What additional requirements apply when capital is used for a buyback?

Answer 11

• Company must first use profits/fresh issue, if available
• Must prepare a directors’ statement of solvency
• Must obtain an auditors’ report confirming reasonableness of solvency statement
• Must pass a special resolution within 1 week of signing the solvency statement

Question 12

What notices must be given to creditors for a capital-funded buyback?

Answer 12

Within 7 days of the Special Resolution:
- Publish a notice in the Gazette
- Publish in a national newspaper or write to all Creditors
- File directors’ statement and auditors’ report at Companies House

Question 13

What rights for creditors have once notice is given?

Answer 13

They may apply to court within 5 weeks to prevent the payment of capital

Question 14

When must the buyback take place after a capital payment is approved?

Answer 14

No earlier than 5 weeks and no later than 7 weeks after passing the special resolution

Question 15

What must be filed with CH after a buyback?

Answer 15

• Return of purchase - SH03
• Notice of cancellation
• Statement of Capital

All within 28 days of delivery of the shares to the company

Question 16

What is a redeemable share?

Answer 16

Issue with terms providing for their future redemption, either on a fixed date or at the option of the company or shareholder

Question 17

Is a contract needed for a redeemable share?

Answer 17

No - redemption terms are usually already set out in the Articles or determined by Directors

Question 18

Can capital be used to fund redemption?

Answer 18

Yes- but only by private companies, and the same rules apply as for capital-funded buybacks