Exiting a Business - Purchase of Own Shares Option

Introduction

A company share buyback, also known as a purchase of own shares (POS), is a strategic option for businesses to manage ownership transitions and optimise financial outcomes. This article outlines the key considerations and processes involved in executing a share buyback.

Overview: Share Buyback

A share buyback allows a company to repurchase its shares from shareholders. This approach can be particularly useful when a director or shareholder wishes to exit the company but no other parties are willing or able to purchase their shares. Common scenarios include retirement or the removal of a dissenting shareholder.

Company Requirements

For a company to repurchase its shares, specific legal and accounting conditions must be met, as outlined in the Companies Act 2006 (CA 2006). Key requirements include:

1. Full Payment on Purchase: Shares must be fully paid up and the purchase must be completed with immediate cash payment.

2. Source of Funds: The purchase must be funded from distributable reserves, the proceeds of a fresh share issue, or capital, subject to stringent conditions.

3. Articles of Association: The company's articles must not restrict or prohibit the POS.

4. Trading Condition: The buyback should primarily benefit the company’s trade, such as resolving shareholder disputes impacting business operations.

Process of Share Buyback

1. Board Approval: The company’s board must approve the POS contract in advance.

2. Shareholder Resolution: An ordinary resolution by shareholders is required to authorize the POS contract.

3. Legal Compliance: The company must notify the Registrar of Companies and pay the applicable stamp duty.

Tax Treatment

The tax treatment of proceeds from a share buyback can vary:

• Distribution Treatment: Payments exceeding the nominal share value are generally treated as distributions.

• Capital Treatment: If certain conditions are met, the proceeds from the share repurchase may be treated as a capital distribution, potentially qualifying for capital gains tax treatment. The conditions for capital treatment include:

  1. Holding Period: The shares must have been held for at least five years.

  2. Reduction in Shareholding: The seller’s shareholding must be substantially reduced by more than 25% of their total prior shareholding.

  3. Benefit to Trade: The buyback must benefit the company's trade, such as removing a dissenting shareholder or facilitating the retirement of a controlling shareholder.

  4. Residency: The seller must be a UK resident for tax purposes in the tax year of the transaction.

  5. Connection Test: After the buyback, the seller and their associates must not retain more than 30% of the company’s issued share capital or voting rights.

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