Private companies will often have reasons why they want to buy back shares in some way and for some reason – someone’s leaving, they want someone to leave - and the obvious thing would seem to be for the company to buy back the shares – and even better, to pay over a period of time. Easy?
Not so easy – get it wrong, or do it when you can’t, and it’s a criminal offence! Some key thoughts:
- Shares can either be bought from capital, or from distributable profits. Whether you can do either of these is a technical issue and you will need accountancy advice;
- Acquisitions from capital are more difficult, more procedural and for that reason, rarer;
- Acquisitions from profits are less problematical, and therefore more common – but the technical rules in the Companies Acts still have to be followed;
- The company cannot pay for the shares over time - this is important. If the shares are bought by someone else, they can be paid under whatever process is agreed, pretty well, but not in a buyback. Either the shares have to be bought back in one payment, when the shares are transferred; or there can be an agreement to buy the shares in tranches, with full payment being made with each tranche. The problems with this are several, and include the fact that the outgoing shareholder will still be a shareholder (entitled to vote, to dividends etc) until every tranche has been paid for; and that his/her shareholding as it reduces might lose the right to entrepreneur’s relief. If the person selling stays in the business – he/she might also be regarded as connected with the business with the payments treated as income.
So it’s not so easy – accountancy advice from an accountant who knows the company well is going to be needed. And of course legal advice to make sure the correct process is followed.
It can of course be made to work; and if it doesn’t, other structures and strategies may need to be considered.
Written by Paul Berwin of Berwins Solicitors.