Share buybacks have a high bar
A share buyback—where a private company purchases shares in itself, is only allowed under the Companies Act if a number of key criteria are met:
- Available distributable reserves must exceed the price paid, evidenced by distributable profits in the management accounts.
- Distributable profits are difference to cash, which must also be available, as the consideration must be paid in full at the time of the buyback.
- Articles of association must not prohibit buybacks.
- Terms must be agreed with the selling shareholder and documented in a written agreement.
- Shareholder approval via a resolution is required.
- Shares must be fully paid.
- Stamp duty (0.5%) is payable.
- Companies House must be updated.
Some criteria are easy to meet, but failure of one of these can cause future problems.
Implications on M&A of imperfect share buybacks
Failure to meet the criteria can void the buyback and, although the shareholder may have received payment, they still legally own the shares. This often emerges during due diligence at a later date in a sale and can seriously impact that event. Usually, there is a delay while the buyback is corrected. The seller may be owed dividends despite having “sold” their shares. A failed buyback may also raise concerns about corporate governance, leading to price reductions or buyer withdrawal from a transaction.
How to rectify the buyback
An ineffective buyback cannot be fixed by a ratifying shareholder resolution. The only options are:
- Repeat the buyback, which means tracking down the original seller and alerting them to the fact that there is an issue. Naturally, many clients going through a sale process do not wish to do this, or can’t, particularly if the buyback was part of an acrimonious exit, if they have lost touch, or died. It may also mean the original seller would need to be told about the M&A transaction, giving them a position of leverage and negotiation.
- An application to the Companies Court – a specialist court within the Chancery Division of the High Court of Justice of England and Wales. This can be expensive and take six – eight weeks.
If you are contemplating a buyback then you should seek legal advice to make sure the formalities of the Companies Act are met. If a past buyback is questionable, act early as it’s best not to be doing so under the pressure of a transaction or the scrutiny of a buyer.
For queries or an early discussion, contact Helen Mead on 01483 467431.
