Exam Ready Notes for CORE Module ‘Business Law’!
Workshop 14 Notes of the Business Module on the Legal Practice Course (LPC) at the University of Law.
These notes were used for the June 2023 exams, where I achieved a Distinction!
BLP WS14
Buy-back of shares
Buy-back of shares generally
If a shareholder wants to sell his shares in a private comp, he would have two options:
1) Find a third party to buy them = transfer of shares
2) Ask the company itself to buy the shares back from him = Buyback of shares
A company has three methods of raising the funds to buy back a person’s shares:
a) use its existing cash (or sell some of its existing assets to provide cash)
b) borrow money
c) issues new shares
A company may not buy-back its own shares from its members except in accordance with the provisions of Part 18 of the
Companies Act 2006 (s658).
® If a company buys back its shares without following the Part 18 procedure:
o An offence is committed by the company and every officer in default.
o The acquisition of shares is void.
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, BLP WS14
How to fund a buy-back of shares:
A share buy-back can be funded out of:
1. Distributable profits (s692(2) or the proceeds of a fresh issue of shares (s692(2)) provided that:
a) the articles of the company do not forbid this (s690(1))
b) the shares must be fully paid (s691(1))
c) when the shares are bought by the company, it must pay for them at the time of purchase (s691(2))
= So the company can fund the buyback of shares with money from profits or from money received from a fresh issue of
shares given by someone else
When a company buys back a shareholder’s shares, it enters into a contract with the shareholder. The contract must be
approved by the shareholders passing an ordinary resolution at a GM or a shareholders WR (s694(2)).
2. Capital (s709) provided that:
a) the articles of the company do not forbid this (s690(1))
b) the shares must be fully paid (s691(1))
c) when the shares are bought by the company, it must pay for them at the time of purchase (s691(2))
If the buy-back is financed out of capital, there are additional procedural requirements which must be met (s713):
d) directors must make a statement of solvency stating that the company is solvent and will remain for the next 12
months (s714) after the buyback out of capital. Directors should make statement carefully and if company is wound
up within one year of the statement and proves to be insolvent, the seller of the shares and the directors of the
company may be required to contribute to the financial losses of the company (s76 of IA 1986)
SEE PROCEDURE PLANS
Decision-making
ü Directors will need an ordinary resolution to approve the buy-back (s694(2)).
ü If buy-back out of CAPITAL, directors need a special resolution (s716(1)).
v Buy out of capital if cost of buyback > distributable profits
v Distributable profits = profit and Loss reserve on balance sheet
Why a buy-back • Cannot find a third party to buy their shares
of shares would • Returns cash to shareholder whose shares are being bought
be considered • Reduced number of shares overall = Increased earnings per share = Company more attractive to
investors
• Way of getting rid of director/problem shareholder who will not resign from board unless shares
are bought at fair price (Assuming other directors don’t want to buy them)
Directors ® Directors must always consider their statutory duties (under s172 (f – fairness of shareholders)
particularly) when considering whether the BB is in the best interests of the company and makes
commercial sense
Why a buy-back Shareholders will ultimately receive the company’s accumulated profit via:
could be o Dividends during company’s lifetime
problematic o Receiving their share of assets/proceeds should company go into solvent liquidation
commercially Þ A BB threatens this as the company gives away money for no consideration (shares are
immediately cancelled under s706(b)(i)), so shareholders are missing out on profits
Effect of buy-back ü Issued share capital is decreased by the nominal value pf the shares
ü Voting control may have altered – Consider for each SH
ü Share premium account is reduced if premium is paid on buy-back or redemption has been
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