Changes to share buyback regulations
The Nuttall Review of Employee Ownership (the Review), published in July 2012, proposed relaxations to the regime which currently applies when a company acquires its own shares (a buyback). The Review found that employees are sometimes reluctant to accept shares or share options, particularly in private limited companies, as it is difficult for them to find a buyer for the shares and realise any value for the shares. The intention is that the simplification of the buyback process will make it easier for companies to buy back shares from employees and perhaps encourage employees to participate in share schemes.
The principal changes to the existing buyback regime – contained in the Companies Act 2006 (Amendment of Part 18) Regulations 2013 – are as follows:
- private companies will be able to buy back shares using small amounts of cash (not exceeding the lower of £15,000 or the cash equivalent of 5 per cent of share capital in any financial year) which do not have to be specifically identified as being distributable reserves, so long as the articles of association expressly provide for this
- where the buyback is in connection with an employees’ share scheme, private companies will be able to authorise buybacks in advance without the need for a buyback agreement
- private companies will also be able to finance buybacks out of capital (subject to the directors signing a solvency statement and the members passing a special resolution), again where the buyback is for the purposes of, or pursuant to, an employees’ share scheme
- the requirement for payment to be made at the time of purchase is relaxed for private companies where the buyback is for the purposes of, or pursuant to, an employees’ share scheme. Payment by instalments will therefore be possible
- off-market share buybacks will be subject to approval by ordinary resolution rather than special resolution. This applies to all off-market purchases; not just those for the purposes of, or pursuant to, an employees’ share scheme
- private companies and unlisted public companies will be able to hold their shares in treasury.
It is important to note that the relaxations on buybacks, in particular, the prior authorisation of buybacks without reference to a buyback agreement, capital financing and instalment options, are only available for employees’ share scheme related buybacks. Nevertheless, the amendments are interesting and will, in theory, make it easier for both the employee to sell his or her shares and a company buyer to fund a share buyback. Only time will tell, however, how effective these new provisions will be in practice.