Partner Article

Control your shares

Rob Ashall, senior corporate solicitor at Brilliant Law (www.brilliantlaw.com), advises small business owners the best solution to end drawn-out boardroom disputes

The last thing any small business can afford is a long, draw-out battle of any kind. You’re too busy doing deals, making sales and driving your company forward.

But disputes happen and if your shareholders or directors are locked in a disagreement that’s at deadlock, then selling shares back to the company could offer the best solution.

What is share buy back?

This is the simplest option for small business owners to have in place as it may be difficult to find a third party buyer for shares, existing shareholders may not be able to afford to purchase more shares, and it negates the need for shareholders to deal with each other.

Typically, it is the directors who implement the purchase of shares on behalf of the Company. They must ensure in the company articles that it is not restricted or prohibited from buying its own shares back. The purchase contract must be approved by shareholder resolution.

A private company may call a general meeting to propose a resolution to approve a share buyback. This must be called with at least 14 days’ notice. Alternatively, a written resolution procedure can be used.

A resolution approving a buy back is not effective if:

A member holding shares to which the resolution relates exercises the voting rights carried by those shares. The resolution would not have passed if those votes had not been exercised. If the company is purchasing shares out of its capital, a special resolution is also required. There are complicated rules about who can vote on these resolutions.

How much should be paid?

Directors determine the price and the valuation may already be stated in a company’s articles of association.

Shares bought as part of a share buy back must be paid for at purchase - it is not possible to defer payment or pay in instalments.

Established practice is that cash is the method of payment, however alternatives could include the transfer of a non-cash asset or set-off against a liability.

How do you pay for these shares?

The simplest means is through distributable profits - where the company is undertaking a buyback as a means of returning surplus cash to shareholders.

A private company can purchase its own shares even when it does not have sufficient distributable profits, subject to special rules.

If the purchase is being made out of capital, the directors must make a statement to Companies House that the company does not risk immediate insolvency, supported by an auditors’ report and you must also give your creditors advance notice. Creditors have rights to object to the buy back.

What could happen if you don’t buy back?

If a company agrees to buy back shares but then fails to do so, the company is not liable in damages. For example, a shareholder could seek an order for specific performance, requiring the company to buy back the shares. If the company shows it is unable to meet these costs from distributable profits, the court must not grant the order.

Any shares bought as part of an off-market purchase should be cancelled immediately upon the return of the shares to the company. The amount of the company’s issued share capital will be reduced by an amount equal to the nominal value of the shares bought back.

A notice of cancellation must be filed with Companies House within 28 days beginning with the date that the shares are delivered. Failure to comply constitutes an offence by the company and every officer in default.

This was posted in Bdaily's Members' News section by Brilliant Law .