The changes to the law on share buybacks introduced in April 2013 significantly simplified the buyback process, especially for companies operating employees’ share schemes, but they also created some uncertainty.
In response to requests for clarification and guidance, the Department for Business, Innovation & Skills has recently published a guide to the changes to company share buyback rules. The guidance clarifies the Government’s interpretation of the rules which will help companies who want to take advantage of the changes (though not all the issues have been resolved).
In order to take full advantage of the changes, companies will still need to review their articles and share scheme arrangements to check that they are compatible with the Regulations.
Background: The Companies Act 2006 (Amendment of Part 18) Regulations 2013 made a number of changes aimed at simplifying the procedures to be followed when companies buy back their shares. The key changes include:
Shareholder approval: Previously, each off-market purchase of own shares required the sanction of a special resolution (ie a 75% majority) but the Regulations now permit them to be approved by a simple majority vote (provided that the company's articles of association do not require a higher majority).
The Regulations also allow shareholders of any company (public or private) to give the board a ‘standing’ general authority to make off-market purchases of shares, dispensing with the need to individually approve each buyback contract. Standing authorities are only permitted where the purchase is for the purposes of an employee's share scheme and are subject to limits on the number of shares purchased and the price paid.
De minimis payments: Provided the company has authority in its articles, private companies are now able to make low value share buybacks with cash without having to identify distributable profits and follow the detailed procedures set out in the Companies Act 2006. The maximum amount that can be paid using this exemption in each financial year is the lower of (i) £15,000 and (ii) the value of 5% of the company’s share capital.
Paying for shares by instalments: Private companies buying back shares in connection with an employee's share scheme may pay the purchase price in instalments (all other buybacks have to be paid in full in cash on completion of the purchase).
Paying for shares out of capital: The Regulations introduced a new simplified procedure for private companies allowing them to finance share buybacks made in connection with employees’ share schemes out of capital using a director's solvency statement and a special resolution (rather than a supporting auditor's report and directors’ report).
Treasury shares: Before the implementation of the Regulations, any shares bought back by a private company had to be cancelled and could not be held for re-use (only listed public companies could hold treasury shares). The Regulations allow all companies to hold shares as treasury shares (provided they have been bought back out of distributable profits or using the de minimis exemption). This enables companies to buy back shares from departing employees and ‘warehouse’ them before either selling them or re-using them to grant further options or awards of shares to employees.
Concerns and clarification: The Regulations were unclear on a number of points and the BIS guidance attempts to deal with these uncertainties and to clarify how the Regulations should be interpreted:
De minimis: There were a number of issues relating to the de minimis exemption requiring clarification.
Firstly, the Regulations are vague and simply refer to 5% of a company’s 'share capital' with no indication as to whether this just means nominal value or whether it also includes share premium. Getting the interpretation right is crucial since a buyback incorrectly carried out will be void. Disappointingly, the guidance has confirmed that the reference is to aggregate nominal value of the company’s share capital. The position taken by BIS is somewhat surprising in view of previous indications from them that the term would include share premium. BIS has stated in the guidance that the aim of the de minimis exemption is to allow small buybacks of shares by number and/or value.
Secondly, it is not clear how and when share capital should be calculated and whether the company needs to re-assess its share capital immediately prior to each buyback. The guidance states that it is for the company concerned to satisfy itself that the limits are not exceeded, particularly where multiple buybacks occur during the financial year. The guidance suggests that one method would be for companies to calculate the 5% at the start of a financial year and use that figure as a reference for multiple buybacks made during that financial year.
Thirdly, the guidance confirms that shares bought back using the de minimis exemption must be repurchased at nominal value. Even though the Regulations do not specify this, BIS’ reasoning is that there are no rules on how you account for a buyback using this exemption if the purchase is at a premium or a discount and therefore the purchase has to be at nominal value (although BIS intends to further consult on this, see below).
‘Simplified’ procedure for buying shares out of capital: The new reduced regulatory requirements for a buyback of shares out of capital in connection with an employees’ share scheme have introduced a layer of uncertainty relating to the timings of such procedure. This uncertainty has resulted in many advisers declining to use the new procedure pending clarification as the consequence of incorrectly carrying out a buyback is that the purported buyback will be void. The guidance does not address this but states that BIS will consult further on this issue.
Employee share schemes: Many of the changes introduced by the Regulations apply only where buybacks are 'for the purposes of or pursuant to an employee's share scheme'. The guidance does not go into detail on the meaning of this phrase but confirms that it not only relates to purchases from members of the scheme but will also extend to shares bought back and held in treasury for later issue as part of an employee's share scheme.
Instalments: The guidance confirms that there should be no prescribed time period dictated by statute for making instalment payments and that this should remain a matter for negotiation between the parties concerned.
BIS has advised that it is considering additional legislation to further improve the Regulations and proposes to consult on further changes:
BIS will also carry out a full post implementation review of the Regulations in 2016.
The BIS guidance is available here.
This article was prepared by Nicola Hancock, corporate professional support lawyer at Penningtons Manches.