23rd April 2013
Parliament has now given its final approval to new rules on share buy backs following the Nuttall Report on Employee Ownership 2012.
In our March newsletter, we reported that, following its consultation on the operation of internal share markets in the context of employee ownership, the Government had introduced draft regulations. These have now been approved by Parliament.
The new rules, which take effect on 30 April 2013, will make it significantly easier for many private companies to buy back their own shares by permitting them to:
- authorise share buybacks by ordinary, rather than special, resolution (so a simple majority will be sufficient);
- authorise in advance multiple share buyback contracts, but only if connected to an employees’ share scheme.
- pay for bought back shares in instalments if the buyback is in connection with an employees’ share scheme. The Government expects that the use of instalments should not be the default position for share buybacks and does not therefore intend to impose specific terms, such as time limits;
- finance buybacks in connection with an employees’ share scheme out of capital, subject to approval by special resolution supported by a solvency statement (this is a significant simplification);
- buy back small numbers of shares (up to the lower of £15,000 or 5% of share capital in any financial year) where the company’s articles so allow and without having to specify that the cash is from distributable reserves (and without this being treated as having been paid out of capital). A special resolution will be required if there is no relevant enabling provision in the articles; and
- hold shares in treasury in the same way as fully listed public companies already do. This will also apply to unlisted and AIM listed public companies.
Companies should note that the expression employees’ share scheme has a specific definition in the Companies Act 2006, and it is important to ensure that the requirements of that definition are satisfied, where relevant. We would be pleased to advise in cases of doubt.
As mentioned previously, the Government plans to conduct a review after three years. This review will consider, among other things, whether:
- allowing share buybacks by ordinary resolutions has had any adverse consequences;
- short notice resolutions should be allowed;
- payment by instalment disadvantages departing shareholders and creditors; and
- shares bought back out of capital or from a fresh issue could be held as treasury shares.
The full text of the statutory instrument setting out the new provisions can be found at: