Company Share Buybacks: What You Need to Know About the Law

If you run a limited company or invest in one, understanding share buybacks (also called share repurchases) is important. These transactions can be a smart way to return value to shareholders, but they must follow UK law. Here’s a practical guide to buying back shares in a limited company.

What is a Share Buyback?

A share buyback happens when a company purchases some (but not all) of its own shares back from shareholders. The bought-back shares are either cancelled or held as treasury shares. This reduces the total number of shares in circulation, meaning each remaining share represents a bigger slice of the company.

The company cannot purchase all of its shares as a company must have at least one issued share.

Why Companies Do Share Buybacks

A share buyback is a really useful tool to enable shareholder exit from a business where a third party sale isn’t possible and the company has sufficient distributable reserves to fund the purchase.

Share Buybacks Under UK Law

In the UK, share buybacks are regulated by the Companies Act 2006, which sets out strict rules for limited companies. Here’s what you need to know:

1. Tax Advice
   It is important to take tax advice before embarking upon this course of action.  Your accountant can apply to HMRC for prior ‘clearance’ of the share buyback which ensures that HMRC will not treat the payment from the company as a payment of dividend and levy tax accordance.
2. Shareholder Approval
3. Funding the Buyback
   Only distributable profits (retained earnings) can be used to fund a buyback. Using capital improperly can breach solvency rules, putting directors at risk of personal liability.
4. Cancelling or Holding Shares
   • Cancelled shares reduce the company’s share capital permanently.
   • Treasury shares can be held for re-issuance later, offering flexibility.
5. Legal Documentation
   Companies must have a formal buyback contract and update their register of members. Any changes in share capital must be reported to Companies House. 

Directors cannot buy back shares without approval from shareholders. This is usually done through a resolution at a general meeting. 

Risks to Consider

• Cash Flow Impact: Spending cash on buybacks may limit funds for expansion or operations.
• Shareholder Preferences: Some shareholders may prefer dividends instead of buybacks.
• Compliance: Non-compliance with the Companies Act 2006 can result in legal and financial penalties for directors. 

Summary

A share buyback can be a powerful tool for limited companies looking to return value to shareholders and optimise capital structure. However, strict adherence to legal rules is essential to avoid costly mistakes.

We recommend that before embarking upon this route, you take advice from your accountant or a tax specialist about whether this course of action is suitable for your company.