Own Share Purchase and Redemption

Question 1

Why might a company purchase its own shares (in a buyback)?

Answer 1

1. To return cash to shareholders, which demonstrates confidence in company. (i.e. when shares brought back by company, company cancels these shares, increasing value of existing shareholder’s shares)
2. To provide marker for buying share (in small, limited companies, there may be no potential buyers other than shareholders).
3. To give company first refusal when a shareholders wants to sell their shares.
4. As an incentive to members not to support a takeover.

Question 2

How does a share buyback return cash to shareholders?

Answer 2

When shares brought back by company, the company will usually then cancel the shares, increasing the value of existing shareholder’s shares

Question 3

Define ‘redemption of shares’

Answer 3

When a company redeems/repurchases its shares from a shareholder.

Question 4

Out of what sources do companies usually pay to redeem or purchase shares?

Answer 4

Distributable profits or the proceeds of a fresh issue of shares.

Question 5

What are redeemable shares?

Answer 5

Redeemable shares are shares issued to members with rights to be bought back by the company at a future date.
- i.e. member has temporary ownership

Question 6

What procedure must be followed if a private limited company wants to issue redeemable shares?

Answer 6

1. Check whether AA’s authorise issuance.
2. Ensure company has non-redeemable shares in issue at same time.
3. Ensure redeemable shares are fully paid up.
4. Check terms of redemption in AA’s.
5. When shares ultimately redeemed, send notification of redeemed shares to CH within 1 month, together with statement of capital.
6. Amend members’ register to reflect cancellation of redeemed shares.

Question 7

What procedure must be followed if a public company wants to issue redeemable shares?

Answer 7

**same as priv limited except for 1st step, you must:
- Check whether AA’s authorise issuance
- SR is passed, AND;
- court approval is given.

Question 8

What if the terms of the redemption are not set out in the AA’s?

Answer 8

An OR can be passed to authorise directors to determine redemption rights (date, price and which party has option of calling it).
- Where directors determine rights, the details of transaction must be set out in statement of capital.

Question 9

What happens to shares that are redeemed by limited companies?

Answer 9

They are cancelled.

Question 10

What is the difference between redeeming and purchasing shares?

Answer 10

For ‘redemption of shares’, the shares are already issued with rights attached to be bought back by company at future date.

For purchase, the company will just purchase ordinary shares that did not have redemption agreement attached to it from beginning.

Question 11

What procedure must be followed if a company (either priv limited or public) wants to purchase shares?

Answer 11

1. Check whether AAs authorise purchase.
2. Ensure company has other shares of its own. (other than redeemable and treasury shares)
3. Ensure shares to be purchased are fully paid up.
4. Contract to purchase is required.Terms must be approved by OR and copy of contract must be retained for min. 10 years.
5. Form SH03 (‘return’) must be sent to CH within 28 days of purchase, with notice of cancellation nd statement of capital.
6. Amend members’ register to reflect cancellation of purchased shares.

Question 12

What is the doctrine of maintenance?

Answer 12

A doctrine which generally prohibits a company from reducing its capital by acquiring its own shares.

Question 13

What are exceptions to the doctrine of maintenance?

Answer 13

Reducing capital by:

1. Redemption of shares
2. Share buyback

Question 14

What happens if a company does not have enough profit or proceeds in order to redeem/purchase shares?

Answer 14

It can use capital or “small” amounts of cash

Question 15

What is a “small” amount of cash?

Answer 15

A “small” amount is the lower of £15,000 or the nominal value of 5% of the company’s fully paid-up share capital at the beginning of the relevant financial year.

Question 16

Describe the procedure for REDEEMING shares using capital.

Answer 16

1. Check whether AAs permit redemption. If not, OR can authorise
   - Ensure any restriction on redemption is followed.
2. Redeemable shares must be fully paid up.
3. Ensure any profits used first, before using capital.
4. Accounts used to determine profits available mustn’t be more than 3 months older than date of director’s statement.
5. Contract to buy shares needed. Must be approved by OR and backed by ‘Statement of Solvency and ‘auditor’s report’.
6. SR needed to approve payment. Within 15 days of passing SR, Solvency statement and statement of capital must be registered with CH or SR won’t take effect,
   - For public comps, court approval may be required too.
7. Company must advertise approval of payment out of capital by notice in Gazette or either in newspaper or in writing to creditors.
8. Share certificates need to be cancelled and reissued and members register is updated.

Question 17

What can creditors do if they disapprove of the redemption from capital?

Answer 17

They can apply to court to cancel the SR
- the actual purchase can take 5-7 weeks after SR to allow time for them to do this.

Question 18

Can ANY company use capital for redemption or purchase of shares?

Answer 18

No, only limited companies can.

Question 19

Describe the procedure for PURCHASING shares using capital.

Answer 19

Same as for redeeming shares except in step 1:
- Company must check if AA’s permit PURCHASE (not redemption). If not, Articles may need to be amended and restrictions must be complied with.

NOTE: company cannot purchase own shares if as a result, there’d be no more issued shares.

Question 20

Can companies purchase own shares if, as a result, there’d be no more issued shares?

Answer 20

No, they cannot

Question 21

What are some reasons as to why a company may want to reduce its capital?

Answer 21

• To return surplus capital to shareholders.
• to create distributable reserves (by transferring amounts from capital to profit reserve for example)
• to form part of a scheme of arrangement.

Question 22

What is the process for reducing capital?

Answer 22

1. Check whether AAs permit reduction.
2. Check that capital isn’t reduced to 0.
3. Pass SR and file Statement of Solvency within 15 days and Statement of Capital with Registrar (or SR can’t take effect)

NOTE: no need for auditor’s report.

Question 23

Instead of going down the ‘solvency statement’ route, what is another way that private limited companies can reduce capital?

Answer 23

By getting approval from the Court
- similar to public companies

Question 24

What must a statement of solvency include?

Answer 24

• Directors must state that they’re of opinion that company can pay its debts.
• Statement must be made by all directors.
• If director makes statement without having reasonable grounds for opinion that company is solvent, this is n offence.
• Must be made no more than 15 days after SR.

Question 25

What is the effect of filing the statement of solvency?

Answer 25

The company's capital reserve is treated as realised profit and is therefore distributable.

Question 26

What type of companies can reduce their share by SR (without needing court intervention)?

Answer 26

Solvent private limited companies

Question 27

What is a scheme of arrangement?

Answer 27

Any agreement between company and its creditors/members. They can agree to anything - so this is another way to reduce and return capital. A proposed scheme must first be approved by 75%+ creditors/members, and then sanctioned by Court. - CO must be registered at CH. - Scheme then binding on all creditors/members.

Question 28

What fee becomes payable when a company buys back or redeems its shares?

Answer 28

Tax (payable by shareholder) - however, money can be treated as a capital receipt (thereby allowing for lower tax through indexation allowance or BADR)