Company Share Buyback – The Importance of Seeking Advice
A Company Share Buyback (or “Company Purchase of Own Shares”) is a common mechanism for shareholders to dispose of their shareholdings in private limited companies; typically to facilitate a shareholder exit without the other shareholders having to personally finance the…
Blog6th Aug 2021
A Company Share Buyback (or “Company Purchase of Own Shares”) is a common mechanism for shareholders to dispose of their shareholdings in private limited companies; typically to facilitate a shareholder exit without the other shareholders having to personally finance the purchase of shares or bring in a third party. In most cases, the company purchases the shares from the original shareholder and the shares are cancelled.
For individuals, certain conditions must be met under tax legislation, to ensure the disposal qualifies for Capital Gains Tax rather than the higher tax of Income Tax. Such conditions include owning the shares for 5 years with the purchase resulting in a substantial reduction, being 75%.
As well as tax legislation requirements there are Companies Act requirements that must be met at the time of the Share Buyback to ensure that legal and beneficial ownership of the shares are removed from the original shareholder.
Some of the typical traps and pitfalls surrounding Share Buyback’s we see when undertaking a Due Diligence project are the Companies House filings or the Register of Members not correctly reflecting the movements in share capital, together with incorrect or incomplete documentation to affect the Share Buyback, further details of which are outlined below.
Recent cases, we have seen, have reaffirmed the importance of seeking legal advice in relation to any proposed Share Buyback, ensuring any documentation is reviewed by your tax advisors to ensure that meets the objectives from a tax perspective and provides the desired result. The tax and legal implications can be costly for both the Company and the existing shareholder where care is not taken in determining whether these conditions are met.
Incorrect Share Capital
An issue that regularly crops up, not only in Share Buybacks, but when a company undergoes a transaction that involves reconciling their share capital, is a difference between the share capital that the company (and/or shareholders and directors) believe there is against the legally documented share capital.
By legally documented share capital we refer to Companies House submissions, the Company registers and the supporting legal paperwork. If some documentation has not been submitted or completed correctly, the resulting share capital may not agree or reflect the intended position.
Where the expected share capital and the legal share capital differ, this will have a substantial impact on the shareholders undergoing a transaction that is reliant on their shareholding, such as not meeting the required substantial reduction for a Share Buyback or not holding enough shares for Business Asset Disposal Relief.
We would recommend that companies reconcile the legal share capital to the expected share capital to ensure this is correct, especially following a transaction in shares.
Incorrect Share Buyback Documentation
We have seen a rise in cases where the Share Buyback legal documentation itself has been incorrect or incomplete. This often comes to light in a company sale process in the buyer’s Due Diligence review. In these cases, the Share Buyback can, in the worst case, be held as void; meaning that the legal and beneficial title of the shares still remains with the original shareholder whose shares were subject to the Buyback. Issues that arise as a result of this incorrect paperwork include:
- Dividends paid since the Share Buyback may still be due to the original shareholder;
- There may be an outstanding Loan and Accounting corrections required;
- Potential tax implications for both the company buying back the shares and the original shareholder (be it an individual or company);
- Where the shareholder is an individual; the availability of Business Asset Disposal Relief/Capital Gains Tax treatment may be adversely impacted; and
- Other administration such as Stamp Duty, Corporation Tax and individuals’ Self-Assessment tax returns.
Although in some circumstances rectification deeds can be entered into by the parties to correct the documentation to the intended position, this is not always possible.
What I Should I Do?
As noted, these issues are not normally discovered at the time of the Share Buyback but typically during a Due Diligence where the legal documentation is reviewed. We would suggest that companies that have undergone a Share Buyback, or any transaction, without the assistance/legal advice to have the legal paperwork confirmed. Furthermore, we would emphasise the importance of seeking advice, both legal and tax/accounting, before entering into transactions of this nature.
For further information or assistance with an existing/intended Share Buyback, please contact Gregor McCallan or your usual Anderson Anderson & Brown contact.