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Share buy-backs – what you need to know
The last month has seen two prominent North West brands, Pets at Home and Franchise Brands, announcing share buy-back programmes (see references below).
There are many benefits in undertaking this activity, including returning value to shareholders or providing an exit route. We do urge caution as, whilst the law and procedure for carrying out a share buyback is quite clear and straightforward, we have dealt with a number of instances where the validity of a share buyback has been questioned and further action required to be taken in order to rectify or ratify the validity of a buyback transaction.
What are the key requirements?
The law setting out the required procedure for a valid buyback is set out in Part 18 of the Companies Act 2006. Whilst the requirements are fairly easy to follow, there are a number of provisions which, if not followed correctly in practice, can call the validity of the buyback into question.
- The company must not be restricted or prohibited from doing so by its articles of association.
- The shares must be repurchased either off-market (i.e. buying shares by approaching existing shareholders rather than through the stock market, or on a recognised investment exchange but where the shares are not subject to a marketing arrangement on the exchange) or on-market (i.e. on a recognised investment exchange).
- Shareholder approval is required (generally an ordinary resolution, but it depends on what the articles say).
- The shares being repurchased must be fully paid-up.
- The consideration for the share buyback must be paid in cash at the time of the purchase (i.e. not on a deferred or contingent basis, and not for non-cash consideration, such as a debt or left on a loan account).
- The buyback must be financed either out of distributable reserves, the proceeds of a fresh issue of shares or, in the case of a private limited company only, out of capital (there is also de minimis exemption for small buybacks, if the articles allow).
- Following the repurchase, the shares must be cancelled or, if financed out of distributable reserves, they can be held in treasury.
Failure to comply with the above will result in:
- The acquisition being void.
- An offence being committed by the company and every officer in default.
Common Mistakes
Some of the most usual ways we have seen void buybacks are as follows:
- The company’s articles did not specifically authorise buybacks (not as common now following the implementation of the Companies Act 2006 – but do check if the articles are from the 1985 Act as more common there).
- The company did not have sufficient distributable reserves to fund the buyback. We therefore always request recent accounts or management accounts to show profits and refer to them in the board minutes approving the transaction to avoid any question around this. If there aren’t sufficient reserves, the company also runs the risk of the payment being classed as an unlawful distribution.
- Purchase price either left outstanding as a loan account, paid after completion or paid in instalments or on a deferred basis.
Case of Interest
Some of the main cases on the subject, which you may want to review to demonstrate the application of the law, are:
- Re RW Peak (Kings Lynn) Ltd [1998] BCC 596 – the company was not authorised by its articles to purchase its own shares (as required under the old 1985 Act) and had not obtained the requisite shareholder approval. The buyback was therefore void.
- Pena v Dale [2003] EWHC 1065 (Ch) – the purchase price was paid in instalments (and not at completion) and was therefore void.
- BDG Roof-Bond Ltd v Douglas and others [2000] 1 BCLC 401 – there were a number of breaches, all of which meant that the buyback was void – the purchase price was paid before completion and partly from non-cash consideration, the company did not have sufficient distributable reserves, and the buyback contract had not been made available to the other shareholders prior to the meeting for approval.
How to rectify void buybacks
Not so much rectifying as re-doing! The main options to correct are:
- In some (limited) circumstances, the company may be able to rely on the Duomatic principle – i.e. showing that all relevant parties indicated their approval to the procedure, albeit not.
- Carry out the buyback again, done in accordance with the Companies Act requirements. For example, put a formal contract in place, pay the purchase price in cash and from reserves and get all the necessary authorisations. Will need to re-do the accounting entries and for cash to be paid back to company and then re-paid for the correct buyback (possible distribution issues if payment not carried out properly).
- Cancel the shares in question pursuant to a statutory reduction of capital – either approved by the Court, or using the solvency statement method. Generally, the Court-approved route would be favourable as it provides conclusive evidence that the shares have indeed been cancelled and should provide a potential buyer with some reassurance of the structure of the share capital.
In Summary
- Check who did the buyback – if it wasn’t carried out by lawyers, alarm bells should be ringing, unless the team are specialists in this area and do them regularly.
- Always do detailed board minutes, referencing (and, ideally, appending) statutory and management accounts and get the company’s accountants to confirm in writing the position regarding the reserves.
- Payments must be made (a) in cash and (b) on completion. No exceptions!!!
Next Steps
We are delighted to offer all Bermans clients a FREE initial review of Companies Register to advise if there are any areas of concern to address. We will also extend this offer to advisers we work with if they have any clients they would like us to review.
Please Contact:
Partner, Corporate
e: robin.hastings@bermans.co.uk
t: 0161 827 4619
References:
BusinessDesk – 26th June 2023 Share buybacks and director investment to boost key stocks –
Share buybacks and director investment to boost key stocks | TheBusinessDesk.com