When buybacks bite back - Kuits Solicitors Manchester

When buybacks bite back

When buybacks bite back

23 Oct 2019

The buying back of shares by a company from its shareholders is a commonly used mechanism to:

  1. Allow a shareholder to exit; or
  2. to return surplus cash to shareholders.

What is a buyback?

The process of a company giving cash to its shareholders in return for its shares, which are then cancelled. It is strictly regulated by the Companies Act 2006 and the detail of the legislation means that it can easily be classed as void because of a failure to follow the letter of the law.

 The ghost of buybacks past…

 Void buybacks can go undetected for years, with unperfected transfers often only being identified when a company is being readied for sale by shareholders, or, worse, by buyers undertaking due diligence on the company.

 Haunted by a buyback: effects of a void buyback

 Where due process is not followed, the resulting unperfected transfer is unlawful and the transaction, accordingly, is void (no matter how long ago it was done). Some consequences are:-

Company:

  • The Company does not own those shares.
  • The Company is owed the purchase monies back.
  • The Company has committed an offence and may be liable for a fine.

Directors:

  • The defaulting directors have committed an offence for which they could potentially be liable for a fine and/or prison sentence of up to 2 years (not that we’ve seen that happen!).

Exiting shareholder:

  • The exiting shareholder still owns the shares which were subject to the buyback.
  • The exiting shareholder is entitled to any dividends paid since the failed buyback.
  • The exiting shareholder is liable to repay monies received from the Company for the shares.

Generally:

  • Decisions requiring shareholder consent that have been made since the buyback may not have validly been made.

How To Avoid Void Buybacks – simple as ABC…D

 Below are some simple rules to help you stay on the right side of the law:

  • Authority – ensure that the company has the requisite authority to buy its own shares and there are no restrictions on this authority by considering both the company’s articles and the terms of any shareholders’ agreement.
  • Buy-back contract – ensure the contract is entered into after shareholder approval has been obtained.
  • Consideration – ensure that there is sufficient distributable profits and pay the consideration at completion in one instalment, and with no deferment.
  • Do NOT DIY your Buyback – consult both your company’s accountant and your legal advisors.

The consequences of failing to adhere to the seemingly simple buyback procedure can be serious and costly. Please call Kuits today on 0161 834 3232 and one of our experts would be happy to help you.

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