Simpler rules for share buybacks

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Posted in:Corporate and Commercial|May 22, 2013 | Join the mailing list

On 30 April 2013 the rules of share buybacks were simplified.  The amendments made are advantageous to private equity-owned companies and those private companies where there is a requirement for employees to give up any shares on the termination
of their employment.  However, there has been no change in tax treatment to coincide with the amendments combined with the restricted scope of the new rules means that it is unlikely that the buyback of employee shares will become common practice in the foreseeable

Prior to the change in rules there were two major hurdles to the buyback of employee shares:

1. for every buyback to happen the relevant contract had to be passed by special resolution; and

2. payment was either from distributable profits, money from a fresh issue of shares or out of the company capital, which again had its own costly procedure.

It was felt that these restrictions were too cumbersome and even with the development of employee benefit trusts (a mechanism allowing for the ownership and procurement of the shares as an alternative to direct company ownership) there was
no simple and cost effective process for share buybacks.

The new rules

Simpler and more appealing the new rules should be more appealing across the board, however in practice the wide spread use will potentially be stifled by the continuance of unfavourable tax treatment.

In essence the new rules will allow private companies to: 

1. Finance de minimis purchases without having to check there are sufficient distributable profits beforehand.  This exemption is subject to a number of limits such as the purchase must be for less than a cumulative £15,000 or less than 5%
of the company’s share capital.  In addition there must be a provision in the company’s articles allowing for the use of this process.

2. Obtain standing shareholder approval.  Therefore, allowing shareholders to only vote once to confirm their approval (continuing for a maximum of five years) instead of having to vote on every transaction.

3. Approve a buyback contract by ordinary instead of special resolution.

4. Use a simplified mechanism for buying shares using capital.  For example removing the cost and time needed by previously requiring a notice to be published in the London Gazette.

5. Pay by instalments no matter how the purchase is financed.

Although the above looks helpful a significant tax issue remains.  If bought by the company, the amount paid for the shares less the subscription price will continue to be treated as a distribution for tax purposes.  As a result any gain
made will be subject to income tax at the dividend rate unless there is a form of exemption to rely upon.  By contrast shares bought by a third party such as existing employee benefit trusts would mean that the employee would be subject to capital gains tax,
but only where a real profit had been made.  As a result, from an employee perspective, where a profit is to be made a purchase by a third party is more appealing than one made by the company.

Therefore, whilst the rules in themselves seem to be advantageous, with the tax practicalities it is unlikely to see there widespread use until the process can become financially beneficial for all parties involved.

Should you have any concerns regarding employee share schemes, or seek guidance and advice in relation to introducing an employee share schemes, amending your articles or want to consider how best to maximise the use of the new rules
please contact Stephen Foster, Head of Corporate at or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. 
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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