21 May 2013

Relaxation of Rules Relating to Private Limited Company Buyback of Own Shares

Relaxation of Rules Relating to Private Limited Company Buyback of Own Shares

Jacqueline Law, Partner and Head of Corporate and Business Advisory looks at the rationale and benefits of the rules relating to a company's ability to buy back its own shares.

Jacqueline Law, Partner and Head of Corporate and Business Advisory looks at the rationale and benefits of the rules relating to a company's ability to buy back its own shares.

“Over burdensome” rules governing a private limited company’s ability to buyback its own shares have recently been simplified.  The proposed changes implement the recommendations of Graeme Nuttall, the Government’s independent adviser on employee ownership, which are set out in his report (“Sharing Success – the Nuttall Review of Employees’ Ownership) published in July 2012.  

The aim of the Government is to make it easier for companies to operate Employee Share Ownership Schemes by facilitating the buyback by the company of such shares when workers leave the company.  The relaxation of the existing rules relating to share buybacks centres around shares which are being purchased in connection with an Employee Share Scheme.  However, some of the changes will apply to all share buybacks made by a private limited company.  

Employment Minister, Jo Swinson, when announcing the changes, commented that “evidence shows that employee owned companies can be more profitable, create more jobs and were more resilient during the economic downturn.  We are committed to making direct employee ownership more attractive, cutting red tape for companies and promoting new and more reasonable ways of running a business.”  

Among the proposed changes are the following:-

• Approval of share buybacks by an Ordinary Resolution ie, 50% approval of shareholders as opposed to the previous 75% approval required;  

• The ability to approve multiple share buybacks in advance;  

• Flexibility to make payment for shares being bought back by instalments which means that liquidity is not the barrier it once was in terms of the previous procedure;  

• The ability to buyback shares out of capital by way of a Solvency Statement given by the directors and approved by Special Resolution;  

• If permitted by the company’s Articles of Association, the ability to buyback shares out of surplus cash (as opposed to distributable reserves as previously) within certain defined limits; and 

• The ability to hold treasury shares in the same manner as held by public limited companies – ie, a private company will be able to hold its own shares without these shares being cancelled as was previously the case.  

Undoubtedly, the changes will provide greater flexibility for companies, particularly for smaller or start up companies which have not yet accrued distributable profits, where the costs and procedure associated with buying back shares from an existing employee out of a company’s capital would have, in the past, been prohibitive.  

The advice of our Corporate and Business Advisory team is often sought in relation to incentivising key workers through employee share ownership strategies.  The changes outlined above represent a significant step in the right direction towards simplifying and promoting employee share ownership.  The changes are likely to benefit not only employees but also to provide a benefit to the company removing the need for the company to incorporate an Employee Benefit Trust (EBT) to warehouse shares which can now simply be held on treasury until required to be distributed to another employee.  

Removing the costs and associated administrative burden of incorporating an EBT could have a significant impact on the willingness and ability of smaller companies to share the equity in their businesses with their employees.


Please correct the errors below before submitting your request:

Get in touch

Our dedicated client contact team prefer to receive enquiries through our contact form. We'll endeavour to get back to you within 24 hours or during the course of the next working day.

Source of enquiry