SGS 10: Returning Value to Shareholders Flashcards
What are the two methods of returning value to shareholders?
- Redemption of shares - s684(1)
2. Buyback of shares - s690
What is redemption of shares and where is it found in the statute?
- S684(1) - private company with a share capital may issue redeemable shares
- Have to check articles of association for restrictions / exclusions: s684(2)
How do shares have to be issued for them to be redeemable?
- S685(3) - Issued as redeemable
- With rights, which entitles company to redeem them at the option of the company according to a formula / price that is pre-determined
- Rights are set out in the AoA - at time of issue, or determined by the directors before the time of issue.
What is buyback of shares?
- S690
- Gives the company the power to buyback shares
- Subject to articles of association, and compliance with Ch4 CA 2006
What are the 4 methods that you can fund a buyback / redemption?
- Use distributable profits to fund a buyback
- Proceeds of a fresh issue of shares to fund buyback or redemption
- Capital
- Cash
How can you use distributable profits to fund a buyback?
- S692(2)(a)(i) - fund buyback
- S687(2)(a) - fund a redemption
What are a companys distributable profits?
- Company accumulated realised profits
- LESS its accumulated, realised losses.
- S736 and s830(2)
How can a company use the proceeds of a fresh issue of shares to fund a buyback?
- Under s692(2)(a)(ii)
- And a redemption - s687(2)(b)
What is capital?
- The amount that is invested by a shareholder that cannot be distributed
- Protection for creditors
- Due to the doctrine of maintenance of share capital
How can a company use capital?
- To fund a buyback - s692(1)
- And a redemption - s687(1)
How can a company use cash?
- S692(1)(b)
- Providing that this is approved in the articles of association
- Up to an amount in a financial year
- That is not exceeding the lower of £15k, or 5% share capital. - s692
- Cash does not have to be from DP. If the AoA is silent then you can use a special resolution
What are the two ways that the CA protects a companys capital to prevent the depletion of capital that is available to creditors?
- Preventing a company making a dividend out of capital
2. For a buyback out of capital, requiring a more onerous procedure
What is an “off-market purchase” where is this found in the statute?
- S693(2)(a) – If shares are purchased otherwise than on a ‘recognized investment exchange’ (i.e. all private company purchases of its own shares). Requirements: are in:
- s694(2)(a) and b
- S696(2)(a) and (b)
What is the effect of a buyback on the balance sheet?
- They are funded out of distributable profits and cancelled
- Net Assets DOWN ↓ - by purchase price amount. Reduced cash at bank to pay for shares.
- Share Capital DOWN↓ - by number of shares being purchased.
- Share Premium Account SAME
- Capital Redemption Reserve UP ↑ - created by s733 – increases by number of cancelled shares
- Total Equity & Undistributable Reserves SAME
- Distributable Profits DOWN↓ - by amount of purchase price – used to fund purchase
- Total Shareholder Funds DOWN ↓ - by amount of purchase price
What reasons might a company decide to buyback shares?
- E.g. Nobody else wants them – no ready market for private companies
- E.g. Where removing a director, automatically take shares off him – forced transfer provisions
- Cash for SH > confidence
- Company first refusal when SH wants to sell
- Incentives to SH not to support a takeover
- If in high levels of debt, will not want to borrow more money (↑ debt) so may get new SH and use money to buyback shares.
- With a dividend, any profits must be paid out to all SH. A buyback can be used to return value to one single SH – i.e. paying money to buy the shares. Also tax difference i.e. capital gains vs. income – CGT is preferable for SH.
