Business - WS5 Equity Finance - Buyback of shares Flashcards
What is the maintenance of share capital?
Hint- company cannot generally purchase its own shares.
A fundamental principle which states that capital provided by shareholders must be maintained and must not be returned to them, as creditors rely on it.
‘Paid up share capital cannot be returned to shareholders and their liability with regard to any capital that they have not paid on their shares must not be reduced’.
This principle has a number of consequences:
- dividends cannot be paid out of capital, just out of distributable profits
- the company must not generally purchase its own shares.
What is the exception to the rule that a company cannot buy back its own shares?
A company can only buy back its own shares as long as the correct procedure is followed (s690)
- a company can purchase its own shares under a court order made under s994 CA 2006 to buy out an unfairly prejudiced minority shareholder and
- a company can return capital to shareholders after payment of the company’s debts, in a winding up.
What is a dividend?
A dividend is a payment the company makes to its members, which provides them with a return on their financial investments in the company.
A dividend may only be made out of ‘profits available for the purpose’.
This means that the company must calculate its accumulated realised profits to date (i.e. its net profits to date) and deduct its accumulated realised losses to date.
Then, a dividend may be paid even if a loss has occurred in that year, provided that, over the years, the accumulated profits exceed the accumulated losses.
What do the MA’s say regarding dividends?
The company’s articles will further regulate when and how a dividend can be paid.
Steps to follow:
1) Check profits are available
2) MA 30-35 - check special articles
3) Directors decide whether a dividend ought to be declared and make a recommendation to the members in the general meeting
4) Members vote (by ordinary resolution) to pay themselves the amount as recommended by the directors or less (note that they cannot vote to pay themselves more than the recommended sum).
If a company does not declare a dividend when it is properly payable, this may be grounds for unfairly prejudicial conduct. However, a company will often wish to ensure that it has sufficient reserves available to deal with future liability.
Can a company buy back its own shares from its members?
- Yes if the correct procedure is followed.
If a company buys back its shares without following the Part 18 procedure:
- An offence is committed by the company and every officer in default
- The acquisition of shares is void.
Why is the buy back of shares heavily regulated?
As it could leave the company in a financially precious position (reducing available profits and / or capital).
Why might a company buy back its own shares?
- Shareholders might want to cut all ties with the company but cannot find a purchaser for the shares.
- Might be restrictions on share transfer, but not enough of the shareholders would support a special resolution to change the articles permitting the shareholders to transfer the shares as they wish.
In such circumstances, the shareholders may be able to persuade enough fellow shareholders to vote in favour of an ordinary resolution authorising the company to buy back their shares.
What is the general rule regarding buy back of shares?
A buyback of shares can only be permitted where distributable profits (dividends) are available.
What is an off market purchase?
Shares which private companies make (not on the stock market).
How can a buy-back of shares be funded?
A share buy-back can be funded out of:
1) Distributable profits
2) The proceeds of a fresh issue of shares or
3) Capital - if the buy back is financed out of capital, there are additional procedural requirements which must be met.
If the buy back is financed out of capital, there are additional procedural requirements which must be met.
How do you know if the buyback will be out of Capital or Distributable Profits?
Capital : the cost of the buy back is MORE THAN the distributable profits plus the amount of money raised from fresh issue of shares.
Distributable profits = company’s profit and loss reserve on its balance sheet.
i.e. when distributable profits are unavailable.
What are the pre-requisites before a buy back can be authorised?
1) Check articles - the articles of a company must not forbid this.
2) The shares must be fully paid - i.e. the current shareholder must owe the company no more money with regards his initial purchase of the shares
3) The company must pay for the shares in full at the time of the purchase
4) The shares must usually be paid for out of distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the purchase.
What is the procedure for buy back of shares (profits, not capital)?
1) Check the articles
2) Check shares are fully paid
3) Directors should consider their duties under ss172 and ss174
4) Check profits are available by producing accounts - Distributable profits must be available or payment made from a fresh issue
5) Ordinary resolution is required - shareholders must approve the buy-back contract. The shareholder buying the shares is not allowed to vote. OR
Written resolution - the shareholder buying the shares is not allowed to vote.
6) Copy of the buy-back contract or a summary of it must be sent or made available for inspection at least 15 days before the general meeting and at the general meeting.
If written resolution is used - the contract must be sent to the shareholders with the resolution or before it is circulated. Time-limit rules out the ability for the general meeting, to be held at short notice.
What is the procedure for buy back of shares from capital?
1) Check the articles do not prohibit buyback
2) Check shares are fully paid
3) Directors should consider their duties under s172 and s174
4) Check whether the profits are available by producing accounts (prepared no more than 3 months before the statement of solvency)
5) No earlier than 1 week before the General meeting, directors must make a statement of solvency (with auditors report annexed) that the company will remain solvency for a year after the transaction.
6) Ordinary resolution required to approve contract
7) Special resolution required to approve buyback from capital - shareholders of shares being bought cannot vote and their votes do not count
8) Copy of buy back contract or a summary of it must be sent with written resolution or made available for inspection at least 15 days before the general meeting and at the general meeting.
9) Copy of the statement of solvency and auditors report must be available for inspection before and at the meeting, otherwise the resolution will be ineffective.
Pre-completion:
1) Notice must be published in the London Gazette and in a national newspaper or in a written notice to every creditor within 7 days following the passing of the special resolution
2) Auditors report and director’s statement must be:
i) Filled at companies House no later than the day on which the first of the above notice is published
ii) Be made available at the registered office for 5 weeks after the special resolution has passed.
The second board meeting to pass the resolution to pass the resolution to enter into the buy-back contract must be held:
i) no earlier than 5 weeks
ii) no later than 7 weeks after the date of the special resolution to approve the buy-back
Post completion Companies House Admin:
1) Directors must
i) pay for the shares (within 2 weeks following the 5 weeks of the special resolution)
ii) must file form SH03 (return of purchase of own shares)
and
iii) SH06(notice of cancellation of shares)
within 28 days
- Make a copy of the contract or summary of it available for inspection at the Company’s Registered Office or SAIL of 10 years after the purchase of the shares
- Register of members must be altered to reflect the change
- Destroy the previous shareholders share certificate
Keep:
- Minutes of the GM for 10 years at the company’s registered office or SAIL
- A record, in writing, for at least 10 years of the decision of the directors to buy-back the shares
- Minutes of the BM for 10 years at the company’s registered office or SAIL
What are the consequences of a director providing a false statement of solvency?
- If the company is wound up within one year of the statement and
- it can be shown that the company was insolvent at the time the statement was made:
The directors and the seller of the shares may be required to contribute to financial losses of the company.
The directors may face criminal sanctions for making the statement without reasonable grounds.
