The steps involved in the purchase of own shares by a limited company

The purchase of own shares by a limited company is a strategic financial move that can serve various purposes, from capital structure adjustment to enhancing shareholder value. However, it’s crucial to navigate the legal requirements and procedures carefully to ensure compliance with the Companies Act and to protect the interests of shareholders. Consulting legal and financial professionals with expertise in corporate governance can be invaluable in successfully executing a share buyback program.

Why Would a Limited Company Purchase Its Own Shares?

1. Capital Structure Adjustment: Companies may opt to purchase their own shares as a means of adjusting their capital structure. This can help them achieve a more balanced equity-to-debt ratio or redistribute ownership among existing shareholders.
2. Return Capital to Shareholders: If a company has excess cash or assets, it can choose to return capital to shareholders by buying back shares. This can be an efficient way to reward investors or provide an exit strategy for certain shareholders.
3. Enhance Earnings per Share (EPS): Reducing the number of outstanding shares through buybacks can lead to an increase in earnings per share, which can be attractive to investors.
4. Prevent Hostile Takeovers: In some cases, companies may repurchase shares to prevent hostile takeovers, thereby safeguarding their control and independence.

Legal Framework for the Purchase of Own Shares

In the United Kingdom, the purchase of own shares by a limited company is governed by the Companies Act 2006. The act outlines various provisions and requirements that companies must adhere to when undertaking share buybacks, including:

1. Source of Funds: The purchase must be made using distributable profits, the proceeds of a fresh issue of shares, or capital redemption reserves.
2. Authority: The company must have authority to purchase its own shares, either granted through its articles of association or a shareholder resolution.
3. Notification: The company must notify the Registrar of Companies about the purchase within 28 days.
4. Payment: Payment for the shares must be made in full at the time of purchase unless the company is paying for the shares in instalments.

Steps Involved in the Purchase of Own Shares

1. Board Resolution: The board of directors should pass a resolution to approve the buyback and specify the maximum number of shares to be repurchased.
2. Shareholder Approval: If required by the company’s articles of association or under the Companies Act, shareholders must pass a special resolution authorizing the buyback.
3. Notice to Registrar: The company must notify the Registrar of Companies within 28 days of the buyback.
4. Payment: Ensure payment for the shares is made using legally permissible funds and in accordance with the agreed terms.
5. Cancellation or Retention: Decide whether the repurchased shares will be canceled, held in treasury, or reissued in the future.
6. Record Keeping: Maintain accurate records of the buyback, including board resolutions, shareholder approvals, and payment details.