Share Buyback Agreements: What, Why and How

A share buyback occurs when a company buys back shares from its shareholders, which has the effect of reducing the total number of shares issued by the company and increasing the proportionate ownership of the remaining shareholders. 

Generally, certain administrative procedures need to be followed, such as:

• determining what type of buyback is being conducted; 
• obtaining the approval from the shareholders of the company (where necessary); 
• preparing & lodging the required notices with HMRC; and 
• disclosing certain information to shareholders.

Why Do Companies Buy Back Shares? 

There are many reasons for and strategies to support a company’s decision to buyback its shares. 

Some of those are:

• To increase the price per share. Reducing the total number of shares issued by a company means that each individual share is worth more, so each remaining shareholder’s shares are greater in value. This can also have a positive impact on the company’s valuation, which can be a good strategy to attract investors as it may suggest that the company is financially healthy.
• Where a shareholder dies or becomes bankrupt or insolvent. 
• Where a shareholder wishes to exit the company, or the company wishes to push a certain shareholder out of the company. 
• For public companies, when the company believes it’s shares are discounted in the market, which may be due to economic or political factors. 

There can also be negative financial effects of buying back shares, so it’s always important to seek advice from a professional before buying back shares to ensure the buyback isn’t actually detrimental to the company in the medium to long term. 

Types Of Share Buybacks

There are several different types of share buybacks, each of which are appropriate in certain circumstances and have rules that must be followed. 

The four main types of share buybacks are:

• Purchase out of distributable profits
• Purchase out of capital
• Purchase out of new issue of shares
• De Minimis exception

Purchase Out Of Distributable Profits

If the company is solvent after a distribution of profits, it can choose to offer share buybacks from these profits.

It’s relatively simple to manage, however, it’s still advised for companies to get advice from a financial advisor before taking final steps.

Purchase Out Of Capital

Private companies can buy their own shares from capital, however, it’s worth checking your Company Constitution in case there is any term that restricts this action.

The process for this type of share buyback is as follows:

1. Shareholders approve the buyback by passing a special resolution
2. Directors provide a statement confirming the company’s ability to repay debts
3. An auditor’s report is then provided to confirm the company’s solvency
4. A public notice is filed in the Gazette
5. The company files the special resolution at Companies House

Purchase Out Of New Issue Of Shares

Sometimes, if the company needs money to find a buyback, they can issue new shares to earn the required finance.

In other words, you can issue shares and use that profit to fund the previous buyback.

Generally, these two decisions must be made within a few months of each other.

De Minimis Exemption

In some cases, companies don’t actually have to follow this specific process for share buybacks. Instead, the company can purchase a buyback of the lower of £15,000 and 5% of nominal value of the company’s share capital.

Need Help With A Share Buyback? 

If you’re organising a share buyback for a company, or you’re a shareholder of a company that is buying back shares, it’s important to seek legal advice to make sure you’ve fully considered the implications of the buyback and that the relevant regulations are followed. 

At Sprintlaw, we have a team of experienced lawyers who can assist you with drafting or reviewing a Share Buyback Agreement, and advise you on what you need to do at each step of the process. 

Get in touch with us at [email protected] or give us a call at 08081347754 or a free, no obligation chat. 

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