Share Buybacks – What Can Go Wrong?

A share buyback is simply the purchase by a company of its own shares, from a shareholder.

A share buyback is a good way to return surplus cash to shareholders, increasing earnings per share, or provide an exit route for a retiring shareholder or one that simply wants to leave the company.

The law is strict around share buybacks, and if the specific and unique procedural requirements are not followed, issues can arise for the company in question.

What happens if I don’t follow the rules?

Not following the strict rules contained within the statute will cause the share buyback to be void in its entirety. This means that any monies paid, shares cancelled, or Companies House filings made are essentially, ‘undone’.

Case law heavily backs this up, specifically, the following scenarios will always be classed as void:

1. For companies that were formed under the old companies act, being the Companies Act 1985, situations where the Articles of Association of the company do not specifically authorise share buybacks will cause such buyback to be void.
2. If a company completes on a buyback, and the company did not have enough distributable reserves or available profits, then again, such buyback will be void. Furthermore, this is also likely to be classed as an unlawful distribution which brings with it further issues.
3. Issues with the purchase price that will cause the buyback to be void:
   • The purchase price was left outstanding on a loan account;
   • The purchase price was paid after completion; or
   • The purchase price was paid in instalments.
4. There are others, such as a lack of contract or required resolution, which is why it is imperative you follow the specific buyback procedure under the statute.

What can I do if the buyback is void?

It is at this stage that you ought to seek legal advice, from experienced professional like those here at Wilson Browne.

There are several options available to potentially rectify a void buyback, but these ultimately depend on the specific details of the situation you are in. Some options are appropriate, and others may simply not work for the scenario you find yourself in. You may have to re-do the buyback, or rely on shareholder’s approval being interpreted from past meetings and evidence of decision making.

In essence, it depends on what part of the strict procedural requirements have not been met, or how long ago it was. If you believe that the buyback you have done is void, or could possibly be void, please see advice.

Why does it matter whether the share buyback is void or not?

A void share buyback can provide hiccups if you come to sell the other shares in the company in the future. Any buyer worth their salt with want to see the buyback documentation, especially if it is a recent one, to ensure that the procedural requirements have been followed.

Furthermore, if the shares were bought under a buyback, held in the treasury, and then transferred to another shareholder, and such shareholder had exercise voting rights or taken dividends, and the buyback was classified as void, then there is an argument that you have been treating someone as a shareholder when they are not. This can open up a can of worms, for example, if the new shareholder is an employee and has been paid dividends then the company has been paying dividends to someone who is not entitled to them, and as they are an employee, there’s an argument that such payments should have been under PAYE, and not a dividend, which with it brings possible tax consequences and liability for the company.

Another issue is that if a share buyback has been completed and the procedural requirements not followed then this is an offence by the company and every officer in default, which can mean the officer is liable to a prison term of two years or an unlimited fine, or both.

All of the above issues could be avoided if you request legal advice from regulated and experienced professionals before you undertake any share buyback, and those here at Wilson Browne would always be happy to help.

To make an enquiry, contact our Corporate and Commercial Team on 0800 088 6004.