Share Buyback in the UK
A limited company must comply with the provisions in Part 18 of the Companies Act 2006 when buying back its own shares.
A share buyback is a transaction between an existing shareholder and a company. A share buyback by a limited company can be done either through an off-market purchase or a stock market purchase, while private company buyback is through off-market only.
A buyback, also known as share repurchase, is when a company buys its allotted shares to reduce the number of shares available on the open market. A buyback allows a company to invest through buying shares from the shareholders who have the intension to dispose their holding shares. The reduction in the number of outstanding shares increases the worth or stake of the remaining shares.
Companies can buy back shares for various reasons. One of the reasons for a listed company to buy back its shares is for increasing the value of remaining shares available by reducing the supply or for preventing other shareholders from taking a controlling stake. A repurchase reduces the total number of shares, thereby inflating earnings per share and, often, the value of the stock.
Other reasons can also happen in private companies where to buy out the shares when the shareholder(s) who is/are no longer wanting to be involved with the company. Reasons for a shareholder to sell his/her shares maybe he/she wants to retire, wants to sell his/her interest in the company, or the shareholder has died. Furthermore, the remaining shareholder(s) maybe unable to buy the shares but do not want any other parties to own them. It may be a third-party purchaser cannot be found. This type of situation is often covered by the terms included in a shareholders?agreement.
A share repurchase can demonstrate to investors that the company has surplus cash available or wants to increase the stake of its investors.
- Share Buyback
It is easy to issue shares but it is complicated to buy back or cancel shares.
Share buyback is a company reacquires its own shares by returning cash to existing shareholders in exchange for a portion of the company’s outstanding shares. Share buyback is a route for shareholders, who can be the directors or employees, to realise value for their shares.
A share buyback by a limited company can be done either through a market purchase or an off-market purchase. A listed company usually buys its own shares back in the stock market while a private company buys its shares back by agreeing a price with the shareholders. A company buyback must firstly be approved by the shareholders and is often covered by the terms included in a shareholders?agreement.
The transaction and the terms must firstly be approved by the shareholders, and passed as an ordinary resolution unless there has any restriction or prohibition in the company’s articles.
- Reason of Buyback
(1)
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Listed Companies
Reasons for listed companies buy back their shares in the stock market may be:-
(a) the share price is seriously undervalued;
(b) in order to give profits and earnings back to shareholders;
(c) to reduce the number of shares in circulation in the market, which might cause stock prices to rise, and increase shareholders?wealth;
(d) for increasing the percentage of remaining shares available by reducing the supply;
(e) for preventing other shareholders from taking a controlling stake.
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(2)
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Private Limited Companies
Private limited companies buy out the shares are often covered by the terms included in a shareholders?agreement.
Reasons may be:
(a) the remaining shareholder(s) unable to buy the shares but do not want any other parties to own them;
(b) third party purchaser cannot be found;
(c) wanting to increase the stake of shareholders;
(d) returning excess cash not needed for the company’s ongoing operations;
(e) avoiding conflict with shareholders over fluctuating dividends.
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(3)
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Shareholder Personal Situation
Reasons for a shareholder to sell his/her shares may be:
(a) to retire;
(b) to sell his/her interest;
(c) the shareholder has died;
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- Payment for Purchase of Own Shares
There are restrictions in the Companies Act relating to payment for shares which means that shareholders need to get protection.
A limited company cannot purchase its own shares unless the buying back shares have been fully paid. In addition, the company must have enough cash available because the shares must be paid for on purchase. Funding share buybacks with borrowed money is generally prohibited for private companies.
A company can raise money by issuing new shares and use the subscribed monies to fund the company to buy back the shares from the leaving shareholder. However, the company needs to make it clear that the sole purpose of the new share issue is to raise money for the buy back.
A private company can buy back its own shares other than cash purchase, but only when there are terms stated in its articles and the purchase was authorised by a resolution of the shareholders. If the repurchase is made out of reserves, then further documents are required and a Law Gazette announcement need to notify its potential creditors.
- Submit Notice to Companies House
A company must give notice to the Companies House to register within one month after the shares are bought back and specifying the details of which class of shares have been cancelled.
The notice must be accompanied by a statement of capital. The statement of capital must state with respect to the company’s share capital immediately following the cancellation.
- Stamp Duty
If the buyback amount (usually called consideration) is ?,000 or less, no stamp duty is payable. However, if the consideration exceeds ?,000, the duty is due at a rate of 0.5%.
- Advantages and Disadvantages of a Share Buyback
Share buyback can be good for investors if the company buys back its shares at a lower price than they are worth. When a company reduces the number of outstanding shares, it increases the stake of shareholders in the company.
On the contrary, share buyback can be bad for investors if the company buys back its shares at a higher price than they are worth. The overpriced purchase leads to a loss to the company, and that it can face possible backlash from the shareholders for not using the profits to expand the company.
Share buyback boosts some performance ratios, such as Earning Per Share. It is also a means of returning cash to shareholders.
See also:
UK Company Share Transfer Procedures and Fees
UK Company Capital Increase Procedures and Fees
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