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Subject to certain requirements, a company can purchase shares from its shareholders.
These can then be extinguished, or held in treasury - the latter can be helpful if the company wishes to issue the shares again in the future, for example to key employees or family members.
There are several benefits to share buybacks. It can return value to existing shareholders, provide a useful mechanism to buyout a shareholder wishing to exit (or a negotiated exit) or act as a neat way to remove employee or minority shareholders from the shareholder pool on their exit or in prescribed circumstances. A share buyback subsequently grosses up the remaining shareholders percentages.
Warning: if carried out incorrectly a buyback is void and accordingly the shares the company thought it had bought back are still with the shareholder - not great. Care must be taken to carry out a buyback properly as there are key legal requirements to be adhered to.
At the basic position in law you cannot compel someone to sell their shares - accordingly, a company cannot force a buyback. Either the company and the shareholder in question agrees or there is a preexisting agreement in place and the prescribed circumstances have arisen permitting the buyback.
A preexisting agreement may be a shareholders' agreement, an employment agreement, the articles of association or a combination. We'd always advise companies with multiple shareholders to have a shareholders' agreement and specific articles that reflect their intentions with shareholders- whether leaving on good or bad terms – and where employees are involved ensuring there is a mechanism in regaining their shares in the event the leave.
Share buybacks can be handy: considering scenarios where the company has right to buyback is certainly a step we would recommend to companies with multiple shares and, however the decision to buyback is reached: getting the buyback carried out properly is fundamental.
For further information, please contact Phil: philipmiles@bexleybeaumont.com | 07388 344576
