Friday, 26 June 2021 10:25

Brodies - The Legal View - Making it easier for companies to buy back shares held by employees

William McIntosh

A recent clarification to the law on share buybacks is intended to make employee share ownership a more attractive option.

The 2012 Nuttall Review on employee ownership identified that company law restrictions on share buybacks discouraged private companies from implementing employee ownership structures. Employers were put off by the difficulties of dealing with employee-owned shares when the employee left. The challenges included:

  • financing the buy back – the Companies Act 2006 restricts how this is done. If the finance was coming from the company's capital rather than from its distributable reserves or the proceeds of a fresh issue of shares, there was a cumbersome, costly and lengthy procedure to protecting creditors;
  • paying for the buyback - as it couldn't be done in instalments; and
  • the procedures required included a special resolution of shareholders approving each buy back contract (which was not practical if the company wanted to buy back from a number of employees at different times).

The government sought to address this in 2013 by relaxing the buyback rules for private companies. Some of the relaxations apply only where the buyback is made for the purpose of, or pursuant to an employees' share scheme. These include the ability to:

  • pay by instalments; and
  • obtain a general shareholder authority in advance for multiple share buy backs, rather than having to get separate approval for each buyback contract.

Other relaxations introduced in 2013 apply to any share buyback by a private limited company, for example whether or not the shareholder is an employee, or where the shareholder is an employee but doesn't hold his shares under an employees' share scheme (e.g. a founder shareholder).

One such measure was the so-called “de minimis exemption”.

The de minimis exemption – as framed in 2013 - allowed the company, if authorised by its articles of association, to buy back shares up to an amount in a financial year not exceeding the lower of:

  • £15,000; and
  • the value of 5% of its share capital.

If the above thresholds applied, the company could buy back out of capital (i.e. regardless of its distributable reserves position), without going through the cumbersome procedure that the law usually requires for buybacks out of capital.

Government guidance published in 2013 said that shares bought back under this exemption must be bought back at their nominal value (i.e. they could not be bought either at a discount or at a premium).

Unfortunately, the way in which this exemption was worded, coupled with the above statement in the government guidance, led to uncertainties. This was illustrated when a director, who was also a 30% shareholder, was leaving the company on agreed terms. One of the agreed terms was that the director would transfer his 30% shareholding to the company for token consideration (i.e. less than the nominal value of 5% of the shares in the company).

It was unclear whether this fell within the de minimis exemption or not. The cautious view is that it did not.

As a result of this (and other uncertainties), the government recently clarified the rules. With effect from 6 April 2015, the exemption applies where the "aggregate purchase price" in the financial year is the lower of:

  • £15,000; or
  • the nominal value of 5% of its fully paid share capital as at the beginning of the financial year.

Changes were also made to the accounting treatment of shares bought back using the de minimis exemption.

The combined result is that the above example would fall within the de minimis exemption. Buybacks of shares at other than nominal value are now specifically contemplated.

The clarification is welcome and should give companies more confidence about their ability to make small share buybacks out of capital without lots of hurdles. Bear in mind, however, that there are still some procedural requirements including:

  • the need for the articles of association specially to permit the company to use the de minimis exemption;
  • a simple contract for the buyback; and
  • shareholder approval of the contract (although, as mentioned above, for buybacks made pursuant to an employees' share scheme, it is possible to obtain a general advance authority).


William McIntosh is a Corporate Partner and Head of the International team at Brodies LLP. You can contact him on 0131 656 0154 or at william.mcintosh @ brodies.com.

If there are any topics you would like us to cover in future columns, please email us at legalview @ brodies.com.

The information in this article does not constitute any form of advice or recommendation by Brodies LLP and is not intended to be relied upon by you in making any specific decisions or taking (or refraining from taking) any action. If you wish us to give such advice, please contact the author.

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