The Government recently published a consultation paper on a proposed relaxation of the regulations which apply to private limited companies acquiring their own shares (a “buy-back”).
Current difficulties with buy-backs
The Nuttall Review in July 2012 considered that the existing regime is overly burdensome – particularly the requirements that: (i) 75% shareholder approval is required for a company to buy-back shares; (ii) consideration for the shares has to be paid in full at the time of the buy-back; and (iii) shares bought back have to be cancelled.
The Nuttall Review highlighted that the existing regime is deterring companies from carrying out buy-backs. In addition, it is indirectly discouraging employees from acquiring shares in the companies they work for through concern that shares cannot easily be bought back.
The Government proposals are due to be implemented in April 2013. The Government wishes to simplify the rules and to encourage employees to obtain a stake in the companies they work for, so as to align their interests more closely with those of the company and its shareholders.
The key proposals are:
i. to allow certain buy-backs to be approved by 50% of the company’s shareholders by way of an ordinary resolution (this should decrease the administrative burden for small companies);
ii. to allow the consideration for shares acquired for the purpose of, or pursuant to, an employee share scheme to be paid in instalments (allowing companies with cash flow difficulties more opportunity to undertake buy-backs); and
iii. to allow shares bought back to be held in treasury and thereby to eliminate the requirement for cancelling shares on a buy-back (allowing them to be re-issued at a later date providing greater flexibility to boards on transferring shares).
Introducing a simpler buy back regime will provide employees, including those who may be retiring or resigning, with comfort that their shares can easily be purchased back by the company.
Majority shareholders who wish to sell their company will be better placed to ensure that such companies can easily buy-back shares from ex-employees, managers or dissatisfied shareholders. This should allow majority shareholders to tidy up share capital and present a ‘cleaner’ picture to any potential buyer prior to sale.
Finally, holding shares in treasury will permit private companies to buy-back shares and reserve them for future use, perhaps for an employee share scheme or a transfer of shares out of treasury. Holding shares in treasury will avoid the need to seek shareholder approval for new authorities to allot and issue shares.
We expect these proposals to be welcomed by UK shareholders in private limited companies.