Share Buy-Backs...The good, the bad and the very messy!

In the current market a share buy-back can be a useful way of buying out a departing shareholder from a business.

Share buy-backs can be funded out of a company’s profits or out of shareholder funds, and so they can also provide a useful way of extracting value from a profitable company or reducing an excessive share capital balance.

Done well, a share buy-back can bring benefits for a business and its shareholders but, done badly, a company can tie itself up in knots that can be very difficult and costly to unwind.

Corporate solicitor at Oglethorpe, Sturton & Gillibrand Jennifer Grabowski explains some of the more common traps into which companies can mistakenly fall:
 

• Not getting formal shareholder approval
A common mistake for owner managed businesses is to assume that if the shareholders are also the directors then separate shareholder consent is not needed. Single member companies can also fall into the trap of not waiting the 14 days needed to hold a proper shareholder meeting. Unfortunately both of these mistakes would mean that the share buy-back hasn’t been properly approved and can be undone.

• Paying for shares by crediting a directors’ loan account
Where a company does not have the cash available to pay for a director’s shares up-front, the temptation can be for the company to pay for the shares by nominally crediting the directors’ loan account. Unfortunately, paying for shares in this way can result in the share buy-back being invalid. That is because the rules are very clear that payment must actually be made to the shareholder on the day that the shares are bought back.

• Using a set of accounts that have not been filed or are older than 3 months
A share buy-back using shareholder capital must be based on a set of accounts that are no more than 3 months old and have been filed at Companies House. Interim accounts can be used, but only if they have been separately filed at Companies House. It is easy to miss such a filing but the effect can be to make the whole share buy-back fail.

Whilst some mistakes can be remedied with extra paperwork, other mistakes cannot be fixed and simply mean that the share buy-back never legally happened in the first place. The share buy-back would need to be unwound and re-done to completely fix the problem, and sometimes that just isn’t possible. The company and the directors responsible for the mistake can also be at risk of a fine or even imprisonment for their failure to comply with the requirements of the Companies Act legislation. Whilst such penalties are rarely imposed, it is a risk best avoided.

As companies who have successfully undertaken share buy-backs would attest, done successfully a share buy-back can deliver positive outcomes for all of the parties involved. Undertaken in haste or without taking proper advice however an attempted share buy-back can waste a lot of time and money without actually achieving the primary objective of buying-back the shares.
 

If you are thinking about doing a share buy-back, or if you simply want more information about what a share buy-back could offer for your business, Oglethorpe, Sturton & Gillibrand can help you steer through the process and help you avoid the many pitfalls.
 

Call Jennifer Grabowski on 01524 846846 for further information.