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Companies intending to purchase shares from employees should ensure that they fully understand recent changes to the share buyback regime, says a Black Country lawyer.
“Regulations which came into force in April 2013 were intended to facilitate employee share ownership by removing certain restrictions on the purchase by a company of a departing employee’s shares,” says Philip Round, a corporate partner based at the Wolverhampton office of George Green LLP.
“The Companies Act (Amendment of Part 18) Regulations 2013 will undoubtedly facilitate the redistribution of shares to a company’s remaining employees following the departure of an employee shareholder. Furthermore, guidance published by BIS in November has clarified certain ambiguities in the original regulations. A company will, however, need to obtain appropriate shareholder authority before availing itself of the revised procedures, and should also be aware of certain limitations to which the buyback regime is subject.”
Mr Round continues: “The Regulations made several important changes. For example, an off-market share buyback (in other words, a purchase of own shares not made via a stock market) which is funded through a company’s distributable reserves can now be approved by an ordinary resolution of the shareholders, requiring a simple majority of those shareholders entitled to vote, rather than a special resolution requiring the approval of at least 75%. Shares purchased out of capital still need to be sanctioned by a special resolution. This is, however, subject to more restrictive requirements which may be imposed by a company’s constitution. Companies should therefore check that their articles do not require all share buybacks to be approved by a special resolution.”
“In an important reform for many SMEs, the Regulations introduced the so-called “de minimis exemption”, enabling private companies to make a small buyback out of capital without having to identify sufficient distributable reserves to fund the buyback. Private companies must, however, be expressly authorised to do so by their constitution, necessitating a change to most companies’ existing articles of association.”
Mr Round continues: “the number of shares which can be bought back in each financial year under the de minimis exemption is subject to a cap equal to the lower of £15,000 and 5% of the aggregate nominal value of the Company’s issued share capital. It was unclear how the percentage should be calculated if a series of buybacks took place in the same financial year, given that the issued share capital will reduce on each buyback. Whilst the Regulations did not cover this point, the recently published BIS guidance suggests using 5% of the issued share capital at the beginning of a financial year as the reference point for all subsequent buybacks carried out during that year.”
“Whilst the Companies Act 2006 does not expressly limit the exemption in this way, the BIS guidance notes state that all shares bought back using the de minimis exemption must be purchased at nominal value. This is apparently because the Act only stipulates the accounting consequences of purchasing at a premium or discount in the context of a payment out of capital, not under the de minimis provisions. BIS does, however, propose to consult on this point.”
All companies can, according to Mr Round, now hold as treasury shares any shares purchased out of distributable reserves or using the “de minimis” exemption, provided their articles do not prevent this. Such shares would previously have been cancelled on buyback, as only listed public companies could hold treasury shares. “This should provide companies with increased flexibility – for example companies will not be required to allot new shares in order to satisfy employee share options if sufficient shares are held in treasury.”
“Finally, companies with large numbers of shareholders will benefit from a new power for shareholders to confer on directors a “standing” authority to approve a series of share buybacks without seeking approval for each individual purchase.”
As Mr Round explains, certain reforms apply only to companies operating employee share schemes. “The purchase price for shares bought back by a company must normally be paid in full on completion of the purchase. Private companies can, however, now settle in instalments the price for shares bought back in connection with an employee share scheme."
“Companies wishing to finance a buyback out of capital must observe potentially costly formalities, comprising the production of a directors’ statement of solvency accompanied by an auditors’ report, and certain public notices. Private companies that purchase shares out of capital in connection with an employee share scheme are now subject to a less onerous regime, which dispenses with the audit report and publicity requirements.”
“BIS has stressed that the more flexible provisions which apply in the context of employee share schemes relate only to schemes involving direct ownership where shares are bought back from employee scheme members or are to be allotted from treasury to scheme members. This is a helpful clarification.”
Mr Round concludes, “whilst the changes should be welcomed by most companies with employee shareholders, there are clearly still a number of traps for the unwary. In order to minimise the risk of a buyback being declared void, any private company contemplating a purchase of its own shares should always seek professional legal advice.”