Share Buybacks: Government Response to Consultation on Implementation of Nuttall Review

On 15 February 2013, the government published its response to the Nuttall Review of Employee Ownership (the “Review”).

The Review considered the barriers to the creation and uptake of employee ownership arrangements.  Currently, the articles of association of private companies (and unquoted public companies) often provide for a compulsory transfer mechanism which requires employees to sell any shares which they own on leaving employment.

However, only certain quoted UK-incorporated companies can hold shares which they have bought using the company’s distributable profits but not cancelled as treasury shares.  Therefore, in many smaller companies, acquiring shares from leavers without cancelling them may require the establishment of an “Employee Benefit Trust” to hold the shares until they can be acquired by a new or existing employee. Alternatively, a private or unquoted company could buy back and then cancel the leavers’ shares in accordance with the provisions set out in the Companies Act 2006.

The Review concluded that a number of the provisions in the Companies Act 2006 relating to the buyback of shares were overly burdensome, and made a number of recommendations for their simplification.  The government intends to implement these recommendations by amending the Companies Act 2006 by secondary legislation. The following proposals will come into force during 2013:

  • It will be possible to authorise off-market share buyback by ordinary resolution;
  • The ability to authorise in advance multiple share buyback contracts to private companies will be extended, but limited to buybacks connected with an employees’ share scheme;
  • Where a buyback is for the purposes of or pursuant to an employees’ share scheme, private companies will be allowed to pay for their shares in instalments with no maximum time limits for such payments;
  • Private companies will be allowed to finance buybacks out of capital (for the purposes of or pursuant to an employees’ share scheme), by special resolution and the signing of a solvency statement;
  • The articles of a private company may provide (or alternatively a special resolution may authorise), that small amounts of cash that does not have to be identified as distributable reserves (not exceeding the lower of £15,000 or 5% of share capital in any financial year) may be used to buy back shares; and
  • Private companies and unlisted public companies will be allowed to hold shares in treasury in the same manner as public companies.

The government plans to conduct a review three years after the enactment of these proposals to consider:

  • the merits of allowing short notice resolutions;
  • whether payment by instalment may disadvantage departing shareholders and a company’s creditors; and
  • the potential advantages of allowing shares to be bought back using capital to become treasury shares or to be issued directly into the treasury.

These proposals will help companies to deal with shares that departing employees are required to sell.  The reforms may encourage companies to make more use of employees’ share schemes and other employee equity arrangements, while the possibility of holding treasury shares may make it easier for unquoted companies to support employees’ share schemes using already issued shares.

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