Purchase of own shares – what you need to know
A company’s purchase of its own shares is unlawful unless a prescribed procedure is complied with.
The consequences of getting it wrong are severe. The consequences of the contravention are that the company is liable to a fine and, ultimately, the purported acquisition will be deemed to be void. Additionally, an offence will be considered to have been committed not only by the company, but by each and every officer. An officer in default is liable to a potential prison term of up to two years, an unlimited fine, or both. Compliance with the strict procedures cannot be avoided by the company using a nominee to purchase its shares on its behalf.
A company can purchase its own shares in the following ways:
- Out of Distributable Reserves – the most common method.
- Out of Cash – this new procedures allows for private companies to purchase shares using small amounts of cash, being the lower of £15,000 or 5% of its share capital in a financial year, without having to state that the cash is from distributable reserves. In order to take advantage of this, the company must be specifically authorised to do so in its Articles of Association.
- Out of Capital – very complex and time consuming – requires a Statement of Solvency and may require advertising costs.
A company can only purchase its own shares if it is done pursuant to a contract or (in the absence of a contract) a written memorandum of the contract terms.
There is one exception to this, covered below. The contract must be approved in advance of the ordinary resolution, and must be available for inspection by the members at least 15 days prior to the meeting. Where the purchase is for the purposes of or pursuant to an employees’ share scheme, a general authority given by the shareholders will be sufficient. It is usually easier to do it under a written resolution to avoid the above timescales. Disapplication of pre-emption rights may also be required, so it’s common that a special resolution is used for the transaction.
You will need to complete forms SH03 and SH06 to deal with the stamp duty and cancellation of the shares.
One question we get asked is “is a transfer form needed?”. The answer is no, only the two Companies House forms.
Stamp duty is applicable on transactions over £1000 and is calculated at ½ per cent of the transaction fee rounded up to the nearest £5.
There is now an option for the shares to be purchased into treasury shares (except for shares purchased out of cash).
These shares are not cancelled and are held by the company and can be transferred at any time.
Payment of the transaction amount must be made on completion of the documents and the documents must be filed at Companies House within 28 days.
Where the purchase is for the purposes of or pursuant to an employees’ share scheme, a company may pay for such shares in instalments (S691(3) CA 2006), although BIS notes that companies that can afford to pay upfront should not pay in instalments.
Under no circumstances should a company buy back its own shares without tax advice.
The purchase price on a share buy-back is generally divided into a capital element and a distribution element for tax purposes. The parties may wish to seek HMRC clearance to treat the purchase as a capital transaction, or they may proceed on the basis of a tax credit certificate.
You may be able to boost distributable reserves to fund a ‘purchase of own shares’ by reduction of share premium reserves, capital redemption reserves and large share capital reserves.
You no longer need authority in the articles to do a purchase of own shares, but it is advisable to check them to ensure they do not contain clauses that state that the company is not allowed to purchase shares.
Our fee for arranging a full purchase of own shares out of distributable reserves including forms and contract is £195.00 plus vat. Additional costs for purchase out of cash or capital.