Share buy back regulations introduced in 2013 have been amended by 2015 regulations that came into effect in April 2015.

The 2013 regulations introduced some ostensibly radical changes (to company lawyers at any rate :)) to the law on how shares should be bought back.

2013 Regulations

For the first time, companies were to be able to pay for their own shares by instalments: the standard rule is that shares must be paid for fully at completion. The apparently radical change was, though, qualified: the buy back had to be “in connection with an employee’s share scheme”. The observer may conclude (perhaps a little uncharitably) that the lawyer who advised the Government on this change was riding a hobby horse of their own: a share scheme lawyer who had perhaps found some examples in practice where a client company wanted to pay by instalments but could not.

An inability to finance a buy back of a substantial shareholding in one go is not an uncommon problem in practice. A less than satisfactory solution to meet this challenge is to structure a multiple set of completions in a buy back agreement. The unsatisfactory aspect of such multiple completions is that a seller who wants capital treatment for his sale must give up the rights to all of his shares on day one. Not a happy situation but made worse by the fact that if the buying company defaults, then an action for damages cannot be taken. The only remedy would be an action for specific performance: to compel the company to honour its buy back commitment. However, if the company has fallen on hard times and has no distributable reserves, such an order will not be made.

A beleaguered (or unscrupulous?) company may like the notion of compelling former employees to sell their shares and then pay them over an extended period. It is by no means clear though why the Government felt it necessary to help them by changing tried and tested company law provisions. Also a buy back of a small employee shareholding is unlikely to be “a problem” and if it is, the company concerned perhaps has bigger problems or ought to let the employee keep their shares! A wry smile then comes to the lips of those of us who struggled to comprehend the need for this piece of legislation sophistry. It transpires that the Parliamentary draftsman called in to aid the employee share scheme practitioners who recommended this change did not think things through.

2015 Regulations

The 2015 regulations have now “clarified the law” as the Department of Business and Innovation puts it. The clarification is that if the shares of the hapless employee are to be bought back out of capital, he is required to surrender them not sooner than 5 weeks, nor later than 7 weeks, from the date of the resolution passed to approve the buy back. The legislation previously required (in common with all purchases out of capital) that the payment of capital (rather than the surrender of shares) had to be in that window. The window is there to allow an aggrieved creditor up to 5 weeks to object to shares being bought back out of capital.

If all of this is leaving you somewhat confused, there is one other sleight of hand to grapple with. The 2013 regulations introduced another apparently radical change to company law on share buy backs. A private company was given a de minimis procedure under which shares could be bought back out of capital without following the complex rules designed to protect creditors. These rules require a Directors’ solvency statement supported by an Auditors’ statement and an advertisement in the London Gazette. As noted earlier, the buy back cannot take place sooner than 5 weeks from that advertisement: a creditor can apply to court in that 5 week period.

The de minimis procedure (designed to simplify company law for small private companies) allows a company to avoid these procedures in any financial year by using cash equal to the lower of £15,000 and 5% of the nominal value of its share capital to repurchase shares. The 2015 changes now make clear that this de minimis procedure can be invoked together with the employee share schemes repurchase by instalments.

There is one final point to consider in all of this. A separate change to the Companies Act 2006 allows for a simplified reduction of capital procedure for a private company: this involves just a Directors’ solvency statement. Using this procedure, you may well be able to cancel shares or a share premium account and thereby create distributable reserves. If you do this, you may be able to avoid a purchase out of capital altogether (whether the complex route with a Gazette advertisement or one relying on the de minimis provision).

The Parliamentary draftsman who struggled with the 2013 regulations and then the 2015 regulations may be forgiven for scratching their head at all this talk of simplifying company law. Special interest groups are, we have learned, very adept at lobbying for changes in the law that leave the average practitioner puzzled.

This is all almost certainly irrelevant to most owner managed companies except that the changes make the law more and more complex and inaccessible. We really do not need laws that are unnecessarily complicated.

Because isn’t life complicated enough?

If you would like further information on share buy backs or other recent changes to company law, please contact us by phone on 0845 686 0960 or by email: james.hunt@everymanlegal.com.