Navigating Off-Market Buyback of Shares from Distributable Profits under the Companies Act 2006 in England and Wales

Off-market share buybacks have emerged as a strategic tool for companies seeking to manage their capital structure. We commonly see buybacks used as part of shareholder exits, as well as reorganisations and restructures.

The Companies Act 2006 in England and Wales provides a robust framework for conducting off-market buybacks of shares from distributable profits.

Understanding Off-Market Buybacks

An off-market share buyback occurs when a company repurchases its own shares from existing shareholders outside of a recognised exchange, i.e., usually a private company. Such transactions are often executed using distributable profits, which, simply put, are profits which have not been used, and are therefore available for distribution to shareholders. The Companies Act 2006 regulates this process to ensure transparency, fairness, and proper utilisation of company resources.

Legal Framework and Pre-Conditions

Before proceeding with an off-market buyback from distributable profits, a company must ensure that it can adhere to certain legal requirements set out in the Companies Act 2006:

Distributable Profits

The company must have sufficient distributable profits to cover the purchase price of the shares. Distributable profits are determined based on the company's latest annual accounts or interim accounts if applicable.

Shareholder Approval

Shareholder approval is vital for the success of an off-market buyback. An ordinary resolution, passed by a simple majority, is required for the buyback to proceed. The company should ensure that it can get the necessary approvals before making any buyback preparations.

Steps in the Off-Market Buyback Process

Drafting Board Resolution

The process commences with the board passing a resolution to initiate the off-market buyback, outlining the shares to be repurchased and the price at which they are intended to be bought.

Buyback Contract

The company must prepare a buyback contract, the terms of which comply with the requirements of the Companies Act 2006.

Shareholder Approval

A general meeting may be convened to pass a resolution to approve the buyback, and specifically the buyback contract, but, more commonly, a written resolution, which has been circulated with the buyback contract, will be passed.

Form SH03 and SH06

After obtaining shareholder approval and entry into the buyback contract, Form SH03 must be filed with Companies House. This form registers the buyback and includes details such as the date of the resolution, number of shares to be bought back, and the amount of the nominal value of those shares. If the shares bought back are to be cancelled, then Form SH06 must also be filed. Before the SH03 can be filed at Companies House, the company will have to pay stamp duty to HMRC, or be satisfied that no stamp duty is payable.

Update of Company Books and Records

Once the buyback has been completed and stamp duty paid, the company books and records of the company must be updated.

Benefits and Considerations

Off-market buybacks offer several advantages to companies, including the ability to efficiently manage capital, and provide an exit for shareholders.

However, companies must carefully consider the process because failure to adhere to the strict requirements of the Companies Act 2006 can lead to the buyback being invalid, leading to the shareholder retaining rights of ownership.

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