The Companies Act 2006 (Amendment of Part 18) Regulations 2015 (the “2015 Regulations”) came into force in April 2015 and introduced provisions amending the rules on buybacks of shares by private companies. These provisions are less in the way of substantial amendments, but serve as clarifications to those provisions previously introduced by the Companies Act 2006 (Amendment of Part 18) Regulations 2013 (the “2013 Regulations”).
Under the Companies Act 2006 (the “Act”), a private company can carry out a buyback of its own shares:
- from distributable profits;
- from the proceeds of a fresh issue of shares made for the purpose of financing the buyback;
- out of capital; or
- with cash up to the lower of (i) £15,000, and (ii) the nominal value of 5% of its fully paid share capital in any financial year (the “De Minimis Exception”).
The buyback will require shareholder approval by way of ordinary resolution (either by written resolution or at a general meeting) to approve the share buyback contract between the company and the selling shareholder(s) before it can be entered into (unless the articles of the company specify that a special resolution is required).
When it comes to buybacks out of capital, there are a couple of extra hurdles to jump over. The buyback can only be funded out of capital once the company has used all of its “available profits,” and the proceeds from any fresh issue of shares made for the purpose of funding the buyback. If this condition is satisfied, the directors are required to make a directors’ statement confirming the information prescribed in section 714 of the Act, and such statement must have annexed to it an auditor’s report supporting the same. In addition to the ordinary resolution mentioned above, the company would also need a separate special resolution of the company’s shareholders (either by written resolution or at a general meeting) before making a payment out of capital.
The 2013 Regulations implemented the De Minimis Exception (as set out in (d) above) to the main buyback rules which private companies (if authorised to do so by their articles) are permitted to use in order to finance the purchase of their own shares.
However, this gave rise to some uncertainty as to, for example, whether the term ‘value’ should include share premiums and as to the accounting treatment buybacks made under the De Minimis Exception should receive. The 2015 Regulations make it clear that the maximum aggregate purchase price under the De Minimis Exception refers to 5% of the nominal value of a company’s fully paid share capital as at the beginning of its financial year.
Furthermore, it is now clear that the accounting treatment for buybacks made under the De Minimis Exception is the same as that for a buyback out of capital under section 734 of the Act, and that shares bought back under the De Minimis Exception are prevented from being held in treasury (which is also consistent with the provisions on a buyback out of capital).
For more information about this topic please contact Charlotte Eliasson or your usual Fox Williams contact