Share buyback regime changes

Date Added 28.03.13

On 19th March 2013, the Government published revised draft Regulations under the Companies Act 2006, which are intended to come into force on 30th April 2013. The aim of the Regulations is to simplify the share buyback procedure to encourage employee share ownership.

Employees, who hold shares in their employer’s companies, are often required to sell their shares when they leave their employment. There are several ways that an employee can sell his or her shares and one of them is the share buyback regime.

The buyback regime, however, was generally seen as overly burdensome and it was therefore reviewed by Graeme Nuttall in 2012, who made recommendations to the Government, which ultimately resulted in the draft Regulations. The most fundamental changes that the draft Regulations intend to make are:-

– allow private companies to fund buybacks (only for the purposes of, or pursuant to, an employees’ share scheme) out of capital, subject to a solvency statement and passing a shareholders’ special resolution (this is similar to the existing streamlined capital reduction procedure);

– allow private companies to buy back shares using cash up to £15,000 or 5% of their share capital in any financial year (which ever is the lower). Cash for these purposes does not have to be classed as distributable reserves (if there is no provision in the company’s articles of association, then a special resolution of shareholders will be required);

– allow private companies to pay for the share buyback in instalments (but again, only for the purposes, or pursuant to, an employees’ share scheme). Under the current procedures, shares sold under a share buyback contract must be fully paid for upon completion of the transaction;

– allow off-market share buybacks to be authorised by ordinary resolution; and

– allow private and unlisted companies to hold shares in treasury on a similar basis to that already permitted for certain public companies.

The Regulations are aimed to help smaller companies to make more use of employees’ share schemes by making it substantially easier to divest exiting employees of their shares. Under the new regime private companies may also be more willing to offer equity participation to their employees and directors.

There are, however, practical consequences of equity participation. Firstly, in the current economic climate, share values are generally low and an employee may therefore benefit more from having a different contractual right, such as an employee bonus scheme, as opposed to a shareholding.

Secondly, not all employees are interested in having a shareholding in a company. They may be reluctant to pay for shares in any company in the current uncertain economic climate with no guarantee of any value for them, when they leave their employment. Individual employees may therefore prefer to hold, for example, EMI options, which are more tax efficient both from their and their employer’s point of view.

Whilst the draft Regulations seem to be a positive step forward, which is intended to help smaller businesses, the practical application of the Regulations may be of a more limited use and should be reviewed on a strictly case by case basis. Feel free to contact us on 01908 396230 to find our whether the new share buyback regime could be of use to your business.

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