When a shareholder leaves a private company, it is often assumed that the only option is to find another person willing to buy the departing shareholder’s shares. Sometimes, however, this is not the only option available, as a company may also be able to acquire its own shares via what is known as a “share buyback”.
A particular advantage of a share buyback is that it can be used to facilitate the exit of a shareholder, especially in the following circumstances:
Departing employee shareholder
On occasions, an employee may receive shares in a company through an employees’ share scheme in order to encourage their continued contribution to the growth of the business. When such an employee leaves the company, a share buyback can be used to purchase the departing employee’s shares, ensuring that they will not continue to have a say in how the company is run.
When a share buyback is for the purposes of, or pursuant to, an employees’ share scheme, it is important to note that the Government recently introduced new legislation that has imposed different rules to those that apply on a more conventional share buyback. Amongst other things, where the share buyback is for the purposes of, or pursuant to, an employees’ share scheme, the new rules waive the usual requirement for the company to pay for the shares at the time of the buyback and allow a private company to pass an ordinary resolution granting a general authority under which multiple buybacks can take place.
Shareholder wishing to exit the company
A private company may only have a small number of shareholders, one of whom may wish to exit the company. In this case, the company’s articles may prevent the outgoing shareholder from selling their shares to a third party (at least in the first instance) and specify that, if the remaining shareholders do not want to buy the shares from the outgoing shareholder, the company can buy the shares itself. Amongst the advantages of the company doing this are that a third party will not gain an interest in the company and, perhaps more importantly, the continuing shareholders will not need to pay any money personally to the outgoing shareholders.
When a company buys its own shares, it is essential that it complies with the relevant legislation. Failure to comply with this legislation can have very serious consequences, principally that the entire transaction is void and the company’s defaulting directors are criminally liable for the breach.
To ensure that you comply with the rules relating to a share buyback, or if you would like to speak to a member of our Corporate and Business Services team about the practicalities of a share buyback for your company, please contact Rory Conwill on 0114 252 1411 or Sarah Riley on 0114 290 6368.