Reorganisations & Company Buyback Of Shares

In addition to other potential legal issues, where you intend to transfer the substantial assets of one business as a going concern to another it is likely that a piece of employment legislation called the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) will apply. These regulations set out certain procedures which must be complied with (including the need to consult with employees on any business transfer) and failure to do so may result in transferring employees being entitled to bring a claim for an automatically unfair dismissal.

The simple answer is yes, so long as your company’s articles of association do not restrict or prohibit you from doing so. However, there is a strict process to follow and how the buyback of shares is achieved will depend on how it is being financed – i.e. whether the buyback is to be funded from distributable profits or from the company’s capital. Both are permissible, but a buyback of capital requires additional documentation and a strict timetable which should be taken into account.

Typically, it is the directors of a company who decide whether that company should carry out the buyback of shares. However, before doing so the directors must check that the shares have been fully paid up (i.e. that the company has been paid the face value for those shares when issued, plus any premium) and that the company is not restricted or prohibited from buying its own shares by its articles of association. In addition, the buyback of shares must be approved by shareholder resolution.

If your company intends to buy back some of its own shares using distributable profits, the company does not generally need approval from its creditors. However, creditors may have direct or indirect influence over any such buyback of shares by virtue of the specific agreements you have with them and so you should review any creditor agreements before proceeding. For example, your creditors might have the right to immediate repayment of any outstanding amounts if the ratio of debt to shareholder funds exceeds a certain threshold (which a buyback of shares could trigger).

Alternatively, if your company intends to buy back some of its own shares out of capital there are specific rules which apply to protect creditors and, unless the shares are being bought back for the purposes of or pursuant to an employees’ share scheme, you must notify your creditors of your intention to buy back shares before doing so. Notification may be achieved by direct communication with those creditors or by advertisement in both The Gazette and a national newspaper. The creditors will then have five weeks from the date of the resolution authorising the buyback of shares to apply to the court to cancel the resolution and prevent the buyback from taking place.