Share buybacks for private companies 

A share buyback is a purchase by a company of its own shares from shareholders. There are various reasons to undertake a buyback, but they all involve increasing shareholder returns. 

We have worked with companies that are admitted to trading on our Private Market (Standard) segment to organise and arrange share buybacks via auction (with all of the benefits of price discovery). This article looks at how share buybacks can be arranged across our platform. 

There are strict rules in the Companies Act 2006 (CA 2006) about the approvals required and circumstances in which a company can buy back its shares. This is to ensure due process and to protect the company’s stakeholders (particularly creditors).  

Legal and professional advice should be sought before executing a share buyback, and nothing in this article should be relied upon as legal advice. 

Why choose a share buyback? 

A key responsibility for a company’s board of directors is to allocate capital in a manner that maximises shareholder returns. The tools available include investment and re-investment in new products and projects with attractive rates of return; the use of debt to leverage the balance sheet; payment of dividends to shareholders; share buybacks etc. 

The main reasons to choose a share buyback to increase shareholder value include: 

Distribute surplus cash to shareholders. A company may have accrued surplus cash from retained profits and/or a disposal of a business unit. Surplus cash that cannot be invested by the business with an adequate return creates a “cash drag” that damages a firm’s return on equity. Like a dividend, a share buyback can be used to distribute this cash to shareholders. Unlike a dividend, a share buyback gives shareholders the option to receive the distribution or remain fully invested. 

Earnings per share (EPS) accretion. When companies repurchase shares, they may choose to cancel them and reduce the issued share capital. This increases EPS and, for a given P/E ratio, will increase the share price for shareholders. However, paying too high a price in the share buyback may result in value destruction. 

Liquidity for shareholders.  Buyers of private company shares tend to be very knowledgeable about the businesses that they are investing in. And who is more knowledgeable than the company itself? A company that wishes to provide liquidity for its shareholders may choose to implement a buyback program to guarantee a buyer (at the right price) for selling shareholders. 

How to do a share buyback 

Under the CA 2006, all share buybacks by private companies are classified as “off-market purchases” and can be funded in one of several ways, the most straightforward of which is from distributable reserves (retained profit). (Note that, for the purposes of the CA 2006, an “off-market purchase” is defined as any purchase not done on a recognised investment exchange, which is a specific regulatory designation given to the large stock exchanges. Share buybacks executed on the Asset Match market are therefore classified as being “off-market.”) 

A private company can only make an off-market purchase of its own shares if there is a share buyback contract approved by shareholders prior to the purchase. An ordinary resolution is usually sufficient unless stated otherwise in the Articles of Association. The contract is a simple agreement entered into between the company and its stockbroker (which is an “intermediary acting as principal” for the purchases). This bilateral agreement to be agreed by shareholders should contain the name and details of the stockbroker, the maximum number of shares to be acquired and the price range that may be paid for the shares. It is best practice for the buyback permissions and contract to be valid for 12 months and renewed annually at the company’s General Meeting. 

Under a separate agreement made between the company and the stockbroker, the stockbroker participates in each auction as principal and then subsequently delivers the shares at the purchase price to the company. From the shareholders’ perspective, a buyback by an intermediary acting as principal is not actually a share buyback and is treated as a normal transaction with a third-party buyer. The transaction is therefore subject to capital gains rather than income tax. 

Upon settlement of the purchases, the company may then hold the shares in treasury or cancel them. The company will also file Form SH03 (Notify a purchase of own shares) and/or SH06 (Notify a cancellation of shares) with Companies House. 

Thinking of doing a share buyback? 

We have arranged share buybacks via auction for several companies admitted to the Private Market (Standard) segment, including in offshore jurisdictions such as the Isle of Man. This includes working with each company’s professional advisers and getting set up with a stockbroker. 

If you are considering a share buyback and would like to know more, then contact us and a member of our advisory team will be able to help.