Share Buybacks – Common Pitfalls

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Luke Wilkins - Solicitor

5 minutes reading time

A share buyback is the process a company follows to purchase its own shares back from one or more of the company’s current shareholders.

A share buyback process can be utilised by a corporation for a number of purposes, including to:

  • Exit a shareholder from the company - This is often considered an efficient way of exiting a shareholder, given that the purchase is typically funded directly from retained profits (rather than out of the taxed profits of the continuing shareholders);
  • Return cash to shareholders – This may be to distribute retained profits or the proceeds of sale following the disposal of an asset by the company; 
  • Operate an employee incentive scheme -This may be used to purchase and cancel an employee’s shares when they leave the company; or
  • Adjust the proportions in which shareholders hold shares – This may be useful where investing shareholders wish to decrease their holding in exchange for realising part of their investment. 

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Share buybacks common pitfalls

The share buyback procedure

The Companies Act 2006 (the Act) sets out the specific and strict procedure for a company purchasing its own shares.

Where this is not followed, the transaction risks being void, and, in addition, an offence may be committed by the company and every officer in default.

A defective buyback means that, even where the selling shareholder receives payment, the shares may not be cancelled and remain an asset of the shareholder, which can create significant legal and tax issues.

It is, therefore, very important that, when dealing with a share buyback, the company takes appropriate advice (both legal and accounting) to ensure it gets it right. 

Below, we explore some of the common mistakes made at each stage, from pre- to post-buyback considerations and give tips to mitigate them.

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The share buyback procedure

1. Pre buyback considerations 

Pitfall 1: Inadequate review of the company’s constitution

Failure to thoroughly review the company’s articles of association and other relevant constitutional documents prior to implementing a share buyback may result in an unintentional violation of restrictions, conditions or specific requirements. 

Before embarking on a share buyback, carefully examine key company documents, including the articles and any shareholders’ agreement, to check whether share buybacks are permitted.

Where they are permitted, there may be limitations or conditions on any buyback or on the particular class of shares for which a buyback is proposed, which should be noted. 

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Pre buyback considerations

2. Financing the buyback

Pitfall 2: Insufficient funding or reserves

The most common ways for a company to fund a share buyback are as follows:

  • out of distributable profits;
  • out of the proceeds of a fresh issue of shares; or
  • out of capital, whether through the full process under the Act or under the de minimis exemption – up to the lower of £15,000 or 5% of the issued share capital in each financial year.

It is important to conduct a thorough analysis of the company’s available funds and consider alternative financing options.

Each funding method has certain procedural steps which should be adhered to.  

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Financing the buyback

3. Share buyback contract

Pitfall 3: Lack of compliance with the requirements for a buyback contract

Except where the buyback of shares is made pursuant to an employees’ share scheme and under the shareholders’ general authority, a company may only make an off-market purchase of its own shares pursuant to a contract that is approved by the members prior to the purchase. 

Whilst the buyback contract is typically a simple agreement providing for the company to repurchase the shares, it is essential that the contract is drafted carefully, including as to how the often-competing interests of the company and the selling shareholder are accounted for and balanced. 

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Share buyback contract

4. Shareholder approval

Pitfall 4: Failure to obtain the requisite approvals

In the absence of a provision in the company’s articles or any shareholders’ agreement requiring a higher level of approval, the default position is that a buyback contract must be approved by a simple majority of the company’s shareholders. 

Transparency around the rationale, the benefits and the risks of the proposed buyback will prove pivotal in gaining the support of shareholders. 

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Shareholder approval

5. Payment for shares

Pitfall 5: Purchase price either left outstanding as a loan account, paid after completion or paid in instalments or on a deferred basis.

It is a legal requirement that any shares bought by a company as part of a share buyback are paid for at the time they are purchased, meaning that it is not possible for the payment to be deferred or paid in instalments. 

Companies must carefully assess their financial position before initiating a share buyback.

Adequate funding should be in place to ensure prompt payment for the repurchased shares. 

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Payment for shares

6. Post-buyback steps

Pitfall 6: non-compliance with post-buyback requirements

Any shares bought back by a private limited company as part of an off-market purchase:

  • may be cancelled or held in treasury if purchased out of distributable profits; or
  • must be cancelled if purchased from the proceeds of a new issue of shares, from capital under Chapter 5 or from capital using the de minimis exemption.

Once the buyback has been completed, companies should promptly complete the following steps:

  • update their register of members to reflect the purchase from the selling shareholder and the cancellation or transfer into the treasury (as appropriate) of the buyback shares; 
  • update the PSC register; and
  • submit the relevant filings to the Registrar of Companies. 

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Post buyback steps

How Myerson can help you navigate the common pitfalls of share buybacks 

Failure to adhere to the statutory procedure when carrying out a share buyback can create significant liabilities for directors and uncertainties, which could jeopardise future transactions.

It is, therefore, prudent to obtain legal advice from experienced solicitors.

Additionally, buybacks are subject to special rules with regard to the tax treatment of the departing shareholder, and it is essential that tax advice is taken as part of the transaction.

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Our team of expert corporate law solicitors are on hand to assist you if you are contemplating a buyback of shares or if you have recently carried out a buyback that you are concerned may be invalid and require our help to rectify.

0161 941 4000

Luke Wilkins's profile picture

Luke Wilkins


Luke has over 2 years of experience acting as a Corporate solicitor. Luke has specialist expertise in mergers, acquisitions, and disposals, as well as providing corporate support to our insolvency and restructuring team.

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