PROCEDURE PLAN
Buyback out of Capital
In order to calculate whether a buy-back will represent the use of a company’s existing share capital, you need to take the
following three steps
Step 1 Ascertain how much it will cost the company to buy the shares back.
Step 2 Add together the company’s ‘distributable profits’ (the figure in the Profit/(Loss) Reserve), and the money (if any)
which the company expects to make from issuing shares to fund the buy-back.
Step 3 If the amount in Step 1 is greater than the amount produced by Step 2, by definition the buy-back will represent
the use of the company’s existing share capital. This is because your calculation has shown that even spending
money representing all of the company’s distributable profits, and spending all the proceeds of issuing new
shares, will not be enough to pay for the buy-back.
Board meeting 1
Prior Decide method of financing buy-back (here, capital)
⇒ Check company’s accounts – are there enough profits to buy back shares out of profits? If not, they
must be bought out of capital (assuming issuance of new shares not proposed) – Account cannot be
more than three months old (s712(7))
⇨ May be a combination of both, profits and capital. Profits must be used first (s.710(1))
⇨ BB financing engages in s172 duty
⇒ Make sure the requirements for buy-back can be met:
✔ Company Articles do not forbid it: s690 and 709 – MAs are silent
✔ Shares are fully paid: s691(1)
✔ Company must pay for shares at time of purchase: s691(2)
✔ Directors must make a statement of solvency stating:
1. That company is solvent and will remain so for next 12 months after buyback (s714(1))
2. Permissible capital payment (what is left over from profits)
▪ If company is wound up within one year of statement and proves to be insolvent, both
seller of shares and directors may be required to contribute to financial loses (IA 1986)
▪ Directors face criminal sanctions for making such statement without reasonable
grounds (s715) and may have breached s172 and s274 too.
⇨ NB: Statement must be made no sooner than one week before the GM (s715); therefore, if
GM is called on full notice, will actually be made during notice period
✔ Commission Auditors’ Report for the directors that the permissible capital payment (max
amount of capital which can be used) is in order/correct and that they do not know anything that
would make the director’s solvency payment unreasonable (s714(6)).
Call MA 9: Any director or authorised company secretary can call
→ Apply to facts
Notice MA 9: Notice must be given to each director, wherever he is, and need not be in writing.
Contents must include MA9(2): Proposed date and time, location, how the directors will communicate if not
in same place.
The notice itself must be reasonable which is what is usual (Re Homer)
→ Apply to facts – if small company, what is usual is often same day
Interest s177: Interested directors must make a declaration
→ Apply to facts and look to exemptions – if directors already aware s177(6)(b)
MA14: Interested directors do not count in quorum nor can they vote
→ Apply to facts – even if didn’t make declaration won’t be able to count/vote - only for resolutions
they’re interested in
Quorum MA11: Any two of the directors
→ Is this going to be satisfied? Do we know who is attending?
→ Say we need at least X and Y – take into account interests – say bare minimum
1
, BLP WS 12/13
Resolutions 1 MA3: BR to approve terms of statement of solvency and auditor’s report
2 MA3: BR to approve draft terms of purchase (terms of buyback contract) – because need to show SHs
what approval is for that directors are seeking
→ Why they need shareholder approval?
⇒ Authority Must be authorised by shareholders by SR: s716(1)
3 s302: BR to call a GM by BR OR s291 BR to propose a written resolution
Voting MA7: Show of hands by simple majority – more than 50%
→ State how the decision would pass with what exact directors are needed
MA13: If deadlock, Chair can use their casting vote
→ Is there a chair? Remember that, practically, avoid doing this – too authoritative
Admin ⇒ s248/MA15: Directors board minutes/written record of each BR must be kept for 10 years at
company’s registered office or SAIL
⇒ Prepare buyback contract
General meeting
Prior Copy of contract must be made available for inspection for no fewer than 15 days before the GM and at
the GM itself (s696(2))
Notice s310: Must be given to every SH and director, and auditors (s502(2)(a)). Must Include:
✔ s311(1): Details of meeting (date, time, location)
✔ s311(2): General nature of the business to be carried out
✔ s325(1): Include statement of rights to appoint proxy
✔ General words of ordinary resolution proposed – can be amended, but not radically to make
meeting ineffective: Betts v MacNaughten
✔ If special resolution proposed: The full wording/text of the resolution and an intention to
propose this at the forthcoming meeting must be included in the notice (s283(6)(a)) –cannot be
amended.
s308: May be hardcopy (handed personally) or electronic or on website
→ On the facts, what is going to more appropriate? Hard copy – if all present at BM. If someone is
absent, going to be posted.
Full notice period
✔ s307(1): Statutory 14 clear days = 16 days (if personally handed)
✔ s1147 CA 2006: Deemed delivery provisions if sent by post or electronically = 18 days
→ How is the notice going to be sent? Work out exact number of days – 16 or 18?
Short notice period N/A
✔ s307(5): A majority in number of shareholders must agree
✔ s307(5)(a) and (6)(a): Those shareholders must, together, hold at least 90% of the voting shares
in the company
⇒ Document consent to short notice must be drawn up
→ Is short notice capable on the facts? Will SHs agree?
→ Is it worthwhile? NOT WORTHWHILE HERE AS 15 DAYS RULE
Quorum s318(2): Is two shareholders
→ Is this going to be satisfied? Do we know who is attending?
Pender v Lushington: No restriction, generally, on shareholders who have conflict of interest in voting in
GM because they are not fiduciaries unlike directors
Resolutions 1 OR to approve the buy-back contract: s694(2)
2 SR to approve using payment out of capital to buy shares: s716(1)
⇨ This must be within one week of directors’ statement (s.716(2)
Voting On the shareholders’ votes, if the ordinary and special resolutions at the GM would not have passed
without the votes relating to shares being bought back, the resolutions will be ineffective (s695(3) and
717(3)).
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