Month: January 2021

In many circumstances, the answer to this question will simply turn on what the seller is willing to sell, but there are advantages and disadvantages to structuring the transaction as a share sale both from the perspective of the buyer and the seller. As a general rule sellers prefer share sales.

Advantages for the seller

For the seller, a share sale will be the best way to achieve a clean break from the business. This is usually particularly important in situations where the current owners of a company are individuals who are planning to retire. Following a share sale, subject to any negotiated future obligations (for example in relation to warranties and indemnities), the seller is able to walk away from the company (and the business within it) having sold all of its actual and potential liabilities. If you go on to study the Private Acquisitions elective module you will also see that there are potentially significant tax exemptions for a corporate seller on a share sale.

Advantages for the buyer

It can be an advantage for the buyer that the entire company will be purchased including all of the assets and liabilities that it has at completion of the transaction. This will mean that the buyer will not have to spend as much time and therefore cost on ensuring that it acquires all of the assets that are required in order to run the business that it wishes to acquire. A great deal of time is spent during the negotiation of an asset sale on agreeing exactly what assets (and liabilities) are to be purchased, as well as dealing with obtaining all third party consents to transfer such assets. Where there is a change of ownership of the assets the consent of customers, suppliers, landlords and others may be required to the assignment or novation of existing contracts. On a share sale there may be certain change of control provisions (e.g. in financing documents) but otherwise there is no need for the third party consents that are needed on an asset sale.

Another advantage for the buyer is continuity – because the business carries on as it did prior to completion there will be less disruption to the business as a result of the change in ownership (e.g. ownership of properties remains the same/employees’ employer remains the same). As far as the outside world is concerned it will look as if there has been no change to the business at all.

A share sale is generally considered to be more straightforward than an asset sale as the only thing being transferred is the shares. However, because the buyer is acquiring the target company (together with its liabilities) on a share sale, more time/costs will be spent on due diligence.

To an asset sale

The parties to an asset sale are as follows:

Buyer/Purchaser: the purchasing company/partnership/sole trader.

Seller/Vendor: the selling company/partnership/sole trader.

The consideration on an asset sale will therefore be paid to the selling company/partnership/sole trader. In the case of a company this will mean that for the consideration to reach the shareholders the selling company will need to declare a dividend or be wound up by its shareholders.

To a share sale

The parties to a share sale are as follows:

Buyer/Purchaser: the purchasing company/partnership/individual(s).

Seller/Vendor: the selling shareholder(s) (which could be individual(s), company(/ies) or partnership(s)).

The consideration on a share sale will therefore be provided straight into the hands of the selling shareholder(s).

Introduction

There are three main types of business media:

1. limited companies;
2. partnerships; and
3. sole traders.

All of these businesses can be acquired, although the structure of the acquisition may differ depending on the type of business.

Terminology

The business or company being purchased is often referred to in practice as ‘target>/b>’, a term which I will use throughout my posts on the topic.

Note that the purchase of a listed company is a special case, and is referred to as a takeover, rather than an acquisition.

Valuing a company

One of the biggest single investments a company can make is to buy another company. It is an investment decision and the cost of the investment needs careful consideration. Therefore, it is necessary to estimate the value of the company before the costs and benefits can be assessed.

If the company is a listed company for example, the share price will be quoted on a stock exchange and therefore it is possible to place a market value on the company. However, suppose that the company is not doing very well and the share price is depressed, the market value may not represent what someone else is prepared to pay for it. Other companies may feel that if the company was better managed they would be able to make more profit and then increase the return and hence value of the company. In addition, we have to answer the same question concerning value even if the company is not quoted and therefore there is no quoted share price available.

So how much would the potential buyer be prepared to pay for the company?

Book value

One value that can be placed on the company is the balance sheet value of the assets. However, as this is a book value it may not be the true value of the assets. Another version of this method is to value all the assets at the break-up value, i.e. how much would be left if all the assets were sold and the liabilities paid.

‘Going Concern’

The book value or break-up value often doesn’t reflect the true value of the company as it will probably be worth more as a going concern (i.e. as a money generating business) than it would if it were broken up and sold. This depends, of course, on how well the company is performing and the future prospects for the company’s products and services.

Future cash flows

If an investor buys a company, they are in effect making an investment that is expected to provide a return. In fact, if the company makes a profit, it could provide a return for a number of years into the future. A common way of viewing this is to say that the purchaser of the company is actually buying a future stream of income that is generated by the profits of the company, or future cash flows.

Viewed in this way, a common way to value a company is to take a number of years’ multiple of the future profits. If we made a bold assumption that the profits are equivalent to cash flows we can calculate the present value of a number of years’ future cash flows. This can be equated to the return that the investor will receive from the investment over a period of time, leaving aside any increase in the value of the company when it is sold.

In reality, there is no best way to accurately value a company, as there is always an element of subjective judgment, e.g. how many years are taken into account and what return is expected.

How do you acquire the business of a company limited by shares?

Such companies are owned by their shareholders who each own shares in the company. As you have learned, these shares are capable of being transferred from one person to another. As a result of this, there are three ways in which you can purchase the business of a company limited by shares:

1. by acquiring all of the shares in the company (a share sale);
2. by acquiring the business of the company as a going concern or by acquiring a particular part of the business of the company as a going concern (e.g. a trading division) (commonly referred to as an asset sale or business sale); or
3. by purchasing the particular assets that you require (a sale of assets).

Note: the sale of target may be conducted via an auction process, whereby a number of potential buyers are invited to submit bids for target.

Share Sales

Share sales occur as a result of a buyer purchasing the issued share capital of a company.

It is possible for a buyer to purchase only some of the issued shares. In such a case, following the purchase, the company will not be wholly-owned (i.e. owned by a sole shareholder) and particular issues may arise in the running of the company as a result of the existence of a minority shareholding. It is more common however for all of the issued shares to be purchased, so that the target company will be wholly-owned following the purchase.

When a share sale completes, the target company itself does not change. It continues to trade as it did prior to completion but with a new owner. The shares will be transferred by stock transfer form.

Asset Sales

Asset sales occur as a result of a buyer purchasing either the whole of the business of a company as a going concern, or when a company has separate and distinct trading divisions within it and the buyer purchases one or more of those trading divisions as a going concern. By ‘a going concern’ we mean that the whole of a business is purchased (or a large proportion of the assets including the goodwill), so that the business can trade after completion of the purchase just as it did prior to completion of the purchase. A key feature of an asset sale is that each asset needs to be transferred separately and have part of the purchase price apportioned to it. For example, a TR1 will be required to transfer any property to the buyer, IP will need to be assigned or licensed to the buyer and contracts will need to be assigned or novated. Employees who work for the business being transferred will transfer to the buyer automatically under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as ‘TUPE’).

When an asset sale completes, ownership of the company selling its assets (i.e. the shares in that company) does not change but the business that is being sold does change hands. Following the sale, the selling company continues to exist. If it has sold the whole of its business, it will now be a ‘cash shell’, a company with no assets except the cash proceeds of the asset sale.

How do you ‘acquire’ a partnership or sole trader?

Partnerships and sole traders operate unincorporated businesses where there are no shares owned, in comparison to limited companies which are owned by the shareholders.

This means that in relation to partnerships and sole traders the only option open to a potential purchaser is an asset sale (i.e. to buy the business as a going concern) or to buy the individual assets that it requires.

This has been a very important area in practice because it has frequently arisen in corporate transactions. Previously the rules prohibiting financial assistance applied to assistance given by all companies.

Since 1 October 2008, the prohibition on private companies from giving financial assistance for the purpose of the acquisition of their shares, or the shares of their private holding company, has been removed. A process commonly known as the ‘whitewash’ procedure was also abolished on that date.

Public companies giving financial assistance for the acquisition of their shares or their parent company’s shares or private companies giving financial assistance for the acquisition of the shares of their public holding company continue to be caught by the financial assistance restrictions in ss.677-683 CA 2006.

Financial assistance has been given a wide interpretation by the courts and can cover any help of a financial nature given by a company for the share acquisition. For example, when an individual wishes to purchase shares in a company, but is having trouble raising finance, the company may consider giving a guarantee to a bank so that it lends the money to that individual to enable the individual to proceed with the share purchase. However, the directors need to be aware that the proposed guarantee may constitute financial assistance in accordance with the CA 2006 and thus be illegal.

The protections in relation to financial assistance in the CA 2006 are another good example of the doctrine of maintenance of share capital. In essence, the money invested by shareholders should boost the net assets of a company and therefore swell the shareholders’ funds and further protect creditors due to the restrictions on releasing those sums during the life of the company. If, however, a company uses its own resources to help a shareholder to buy shares in it, then it is offending the principle of maintenance of share capital.

Hence, the legislation is designed to protect the company’s assets representing share capital. It is therefore vital to be able to identify financial assistance before it occurs and to be able to determine whether or not it is possible to make it lawful (and how to do so). For instance, where financial assistance is proposed to be given by a public company for the acquisition of its own shares, if that company is re-registered as a private company, it will then fall outside the prohibition on the giving of that assistance.

A scheme of arrangement is a statutory procedure under ss.895-900 CA 2006 ‘where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between the company and its members, or any class of them’ (s.895(1) CA 2006).

A scheme can be a compromise or arrangement about anything which the company and its creditors or members can agree between themselves. Schemes are used for many purposes, including returns of capital, reductions of capital, company reorganisations and insolvencies.

The key stages of a scheme of arrangement are as follows:

Stage One

The company, creditors or the members apply to the court.

Stage Two

The Registrar will make an order on the claim form convening meetings of the relevant classes of members or creditors. Currently, it is usual for 21 clear days’ notice to be given to members and/or creditors. Depending on what the scheme is being used for, a general meeting may also be required, but this is entirely separate from any court meetings. Notice of the court-convened meetings must be accompanied by an explanatory statement explaining the effect of the scheme.

Stage Three

The resolution to approve the scheme will then be proposed at the class meeting(s) convened by the court. To be effective, the scheme must be approved by a majority in number representing 75% in value of either creditors or members (or any class of creditors or members) who vote at the meeting and be approved by the court (s.899(1) CA 2006).

There may be more than one court meeting. The court must summon meetings for each of the relevant classes of member. These meetings operate in much the same way as a standard general meeting save that they are convened by the court.

Following the court-convened meeting(s) the chairman will report to the court with the result.

Stage Four

The court will then hear the petition to sanction the scheme. The court has discretion in its decision. In deciding whether or not to sanction the scheme the court must be satisfied that:

• approving the scheme is reasonable;
• each class has been fairly represented by those attending the meeting; and
• the statutory provisions have been complied with – for example, correct notice having been given of the court convened meeting, sending out the explanatory statement, or passing the resolution to approve the scheme correctly.

Stage Five

Once the scheme has been sanctioned by the court, an office copy of the s. 899 CA 2006 order must be filed at Companies House. The order is not effective until this has been done. Once the court has sanctioned the scheme and the court order has been registered at Companies House, the scheme becomes binding on all the members and creditors (s.899(3) CA 2006).

The major advantage of schemes of arrangement is that they can be organised in many different ways, without, for example, the constraints imposed by the specific statutory provisions for a buy-back or an insolvency arrangement.

General

This is another exception to the doctrine of maintenance of share capital.

A limited company having a share capital may reduce its share capital:
(a) in the case of a private company limited by shares, by special resolution supported by a solvency statement (see ss.642 to 644 CA 2006);
(b) in any case, by special resolution confirmed by the court (see ss. 645 to 651 CA 2006).

There are a variety of reasons why a company might wish to reduce its share capital:

• it may wish to create distributable reserves, which increases its ability to pay dividends;
• it may have surplus capital which it wishes to return to its shareholders;
• there may have been a substantial reduction in the value of the assets of the company with the result that the share capital of the company is no longer representative of the true value of the assets of the company;
• so the company can carry out a redemption of its redeemable shares or purchase of its own shares where it does not have sufficient distributable reserves to redeem or buy back the shares; or
• it may form part of a ‘scheme of arrangement’ which is a method of structuring mergers and acquisitions.

In such cases, the company can agree to reduce its capital by special resolution, but, unless the company is a private company, the resolution is not effective unless confirmed by the court, on petition by the company.

Section 654 CA 2006 states that any reserve arising from the reduction of capital is not distributable without the consent of the Secretary of State. The Companies (Reduction of Share Capital) Order 2008 provides that (subject to anything to the contrary in the shareholder resolution relating to the reduction or anything in the company’s articles) if a private company reduces its share capital supported by a solvency statement but does not apply for a court order confirming the reduction, then the reserve will be treated for the purposes of Part 23 CA 2006 (which deals with distributions) as a realised profit. The position is slightly different if a private company reduces its share capital and the reduction is confirmed by the court – in such a scenario the reserve will be treated as realised profit for the purposes of Part 23 CA 2006 unless the court orders otherwise.

The key stages of a reduction of capital using the court procedure are as follows:

Preliminary Stage

Check the articles of the company – a reduction of capital must not be restricted or prohibited by the articles (s.641(6) CA 2006).

Stage One

A timetable for the reduction needs to be agreed by the court. Three key dates need to be agreed:

• the date by which the petition must be presented to court;
• the date of the directions hearing; and
• the date of the petition hearing.

Stage Two

A special resolution must be passed approving the reduction of capital.

Stage Three

Once the special resolution has been passed, the company can present the petition to the court. The company will also issue an application notice setting out directions to be sought from the court at the directions hearing.

Stage Four

The petition must be supported by either a witness statement or an affidavit of the chairman of the general meeting when the special resolution was passed.

Stage Five

The directions hearing will take place at which the court will consider the position of the creditors. The court will not confirm a proposed reduction of capital unless it is satisfied that the interests of all the company’s creditors who are entitled to object to the proposed reduction are not adversely affected by the proposal. The court will also want to check that the appropriate approvals and consents have been obtained. Normally the court will provide for the advertisement of the petition in a broadsheet newspaper. The advertisement will be placed in a broadsheet seven days before the date that has been fixed for the hearing of the petition.

Stage Six

The Companies Court Registrar will hear the petition to reduce the capital in open court.

Stage Seven

The reduction will become effective once the court order and a statement of capital have been registered at Companies House. The registration of the order will then be advertised in a broadsheet newspaper. It is important to be aware that in certain situations creditors may have the right to object to the reduction and if the reduction affects separate classes of shareholders differently, there may be issues with class rights under s.630 CA 2006.

Reduction of capital by private companies under the solvency statement procedure

Under the CA 2006 there is also a non-court procedure for private companies only to reduce their capital. The availability of the procedure is subject to any restriction or prohibition in the company’s articles. The company cannot use the procedure if, following the reduction of capital, only redeemable shares will be in issue or the issued share capital will be reduced to zero (s.641(2) CA 2006). In addition, the company should ensure that one person will not end up holding all of the shares (unless the conditions in s.641(2B) CA 2006 are met.

The procedure is set out in ss.642-644 CA 2006. The company’s shareholders are required to pass a special resolution to reduce capital and the directors have to sign a statement of solvency. The special resolution must be passed within 15 days of the date that the directors’ solvency statement is made.

Within 15 days of the resolution being passed, the company must file the special resolution, the solvency statement and a statement of capital at Companies House. The resolution cannot take effect until these documents are registered. Note that there is no requirement for the directors’ statement to be supported by an auditors’ report, unlike a redemption/purchase out of capital.

An advantage of seeking the court’s approval of a reduction of capital is that, once confirmed by the court, the procedure cannot be challenged. In addition, as each director needs to make the solvency statement, if any director refuses to do so, the court procedure will need to be followed (unless the director resigns). However the court procedure will take longer and be more expensive.

Where a company redeems or purchases its own shares, tax will usually become payable by the shareholder.

In most cases, any payment to a shareholder exceeding the amount paid on allotment of the relevant shares is treated as a distribution (dividend) to that shareholder (see your Tax Workbook for tax treatment of distributions) unless repayment is on a winding up of the company. Therefore, as a general rule, the proceeds of a share buy-back will be treated as an income receipt in the hands of the shareholder.

However, ss.1033-1045 CTA 2010 allows the money received on the buyback to be treated as a capital receipt if the following conditions are satisfied:

1. the shares must be in an unquoted trading company;
2. the seller must be resident in the UK in the tax year in which the sale occurs;
3. the shares must have been owned for at least 5 years;
4. there must be a ‘substantial reduction’ in the seller’s shareholding (at least a 25% reduction in the percentage of the seller’s shareholding is required);
5. for 12 months after the purchase, the seller must not hold more than 30% of the company’s:
   1. issued ordinary share capital; or
   2. share and loan capital; or
   3. voting power.

   N.B. The shares bought back by a company are cancelled so the number of shares in issue are reduced; and

6. the buy-back must benefit the trade and must not be part of a scheme to avoid tax or enable the shareholder to participate in the company’s profits without receiving a dividend.

These are quite stringent rules but where they can be met the shareholder will treat the receipt as capital in nature. This could mean that various CGT reliefs and exemptions can be utilised to reduce any gains made (e.g. the annual exemption), resulting in less tax being paid than would be the case if the money received was taxed as an income receipt. Importantly, the capital treatment is not optional: if the conditions are met, this treatment will apply.

Unless the purchase price for shares bought back is below £1,000, the company will usually have to pay stamp duty on the purchase unless one of a few limited exceptions applies.

Shares which have been redeemed or purchased by a company are normally cancelled. However, in practice you will find that companies can, if they wish, purchase their shares out of distributable profits and hold them ‘in treasury’ instead of having to cancel them. Shares purchased out of a fresh issue of shares or out of capital cannot be held as treasury shares (and this includes shares purchased by using the De Minimis Procedure). Treasury shares can be held in treasury indefinitely, sold for cash, cancelled at any time, or transferred for the purposes of an employees’ share scheme.

Prior to 30 April 2013, only companies whose shares were quoted on the Main Market of the London Stock Exchange, AIM and other investment exchanges could hold treasury shares. This restriction has now been removed and all companies are now able to hold shares in treasury. No s.551 CA 2006 authority is required to sell shares held in treasury, but s.561 CA 2006 preemption rights apply to treasury shares as if the sale of treasury shares were an allotment of ‘equity securities’.

A purchase of own shares takes place when a company purchases shares in itself from an existing shareholder. A company may decide to purchase shares from a shareholder when there is no other buyer available.

It is worth noting that a company can purchase redeemable shares. Where the company purchases redeemable shares, that does not amount to a redemption of those shares where the purchase is not carried out on the terms for redemption set out either in the articles or determined by the directors prior to the allotment of such shares. A public, listed company with listed redeemable shares may choose to purchase them rather than redeem them if they are trading at a discount, as this would be cheaper than redemption.

There are three sources for a company to finance a purchase of its own shares:

1. out of profits;
2. out of the proceeds of a fresh issue of shares; and
3. out of capital either in compliance with Chapter 5 CA 2006 or using the De Minimis provisions set out in s.692(1ZA) without following the requirements of Chapter 5.

Before examining these methods of a company financing a purchase of its own shares, we must consider a further distinction made by CA 2006 between two sources of authority for a company to make a purchase of shares, namely ‘off-market’ and ‘market’.

Authority for making a purchase of own shares:

The two possible ways in which a company can obtain authority to make a purchase of its own shares are by making:

• an ‘off-market’ purchase; or
• a ‘market’ purchase.

Off-market purchase of own shares

The definition is set out in s.693(2) CA 2006. This is when a purchase of own shares takes place otherwise than on a ‘recognised investment exchange’ (for example, the London Stock Exchange). (The same term also covers a purchase made on a recognised investment exchange of shares not subject to a ‘marketing arrangement’ on the exchange. Section 693(3) CA 2006 sets out when a company’s shares are subject to a marketing arrangement.

The conditions that need to be fulfilled to make a valid off-market purchase are set out in s.694 CA 2006:

• a contract to purchase own shares is required (s.694(1) CA 2006); and
• the terms of the contract need to be approved by ordinary resolution (s.694(2) CA 2006). The contract may be entered into with the purchaser conditional on the ordinary resolution being passed. The shareholder whose shares are being redeemed can vote on the resolution at a general meeting but the resolution will be ineffective if his votes in respect of the shares being redeemed carry the resolution (s.695(3) CA 2006). Therefore that shareholder should be advised to abstain – unless some, but not all, of his shares are to be purchased, in which case he may safely vote on a poll in respect of the shares that he is keeping. If the resolution is passed as a written resolution that shareholder is disenfranchised for that vote (s.695(2) CA 2006).
• There are separate requirements if the off-market purchase is made pursuant to an employees’ share scheme.

The disclosure requirements for an off-market purchase are as follows:

• Where an ordinary resolution to approve an own share purchase is proposed at a general meeting, the contract must be available for inspection at the company’s registered office for a period of 15 days before the general meeting and also at the general meeting. Where such a resolution is proposed as a written resolution, a copy of the contract must be sent together with the copy of any written resolution (s.696(2) CA 2006).
• Within 28 days of the date on which the shares that are bought back are delivered to the company, the company must send a return to Companies House under s.707(1) CA 2006 and a notice of cancellation under s.708(1) CA 2006 together with a statement of capital (s.708(2) CA 2006).

Market purchase of own shares

The definition is set out in s.693(4) CA 2006. This is when the purchase of own shares by a company does take place on a recognised investment exchange (such as the Main Market of the London Stock Exchange).
Section 701(1) CA 2006 specifies that an ordinary resolution of the company is required to approve the market purchase of own shares (although in practice, shareholders of listed companies may ask for a special resolution). A return must be filed with the Registrar of Companies (s.707(1) CA 2006) and a notice of cancellation of the shares (s.708(1) CA 2006) together with a statement of capital (s.708(2) CA 2006) within 28 days of the date on which the shares that are bought back are delivered to the company.

Purchase out of profits or the proceeds of a fresh issue of shares

When a company is purchasing its shares from the selling shareholder, the company must first use any money it has available to it either in the form of distributable profits (unless the De Minimis provisions apply) or it may use money raised from a fresh issue of shares to fund the purchase. In both of these cases the procedural requirements are very straightforward because the capital of the company is not reduced. Where distributable profits are being used wholly or partly to finance the purchase of shares, the amount of distributable profits available should be verified by the company’s accountants.

When new shares (i.e. a fresh issue) are issued by a company to a shareholder (new or existing), the subscribing shareholder pays the company for these shares. The proceeds of such fresh issue of shares which is made for the purpose of the purchase or redemption can then be used by the company to fund the purchase of its own shares.

A company may purchase its shares out of distributable profits or the proceeds of a fresh issue of shares for the purpose of the purchase if the following conditions are met:

• the purchase of own shares by a limited company, whether public or private, is not restricted or prohibited in its articles (s.690(1)(b) CA 2006);
• the shares being purchased by the company are fully paid up (s.691(1) CA 2006); and
• following the purchase, the company must continue to have issued shares other than redeemable and treasury shares. This is because if the company purchased shares leaving only redeemable and treasury shares in issue, the company could potentially be left with no issued share capital / no shareholders.

The requirements for an off market purchase of shares apply to a purchase out of distributable profits or a fresh issue of shares. Accordingly, a contract will be needed for such a purchase, and it will need to be approved by ordinary resolution.

Reduced procedure for private companies making de minimis purchases of shares (the ‘De Minimis Procedure’)

The De Minimis Procedure (s.692(1ZA) CA 2006) allows private companies to purchase shares using capital without complying with Chapter 5 CA. The amount of the shares that can be bought back under this procedure is capped at an aggregate amount in a financial year not exceeding the lower of:

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

This provision effectively allows private companies to make small amounts of share purchases out of capital each year without following the procedures set out in ss.709-723 CA 06. Private companies can therefore purchase their own shares under the De Minimis Procedure without having any distributable profits.

Guidance issued by BIS has clarified that the purchase price of the shares under the De Minimis Procedure can be at more than the nominal value (so at a premium) or less than the nominal value.

Note that a company’s articles must authorise it to follow this procedure so that, where the articles are silent, a special resolution will be required to be able to rely on this provision. In addition, the requirements for an off-market purchase apply to a De Minimis Procedure. Accordingly, a contract will be needed for a De Minimis Procedure, and it will need to be approved by ordinary resolution.

Purchase of own shares out of capital in compliance with Chapter 5 CA 2006

Only private companies are permitted to fund a purchase of their own shares out of capital (s.692(1) CA 2006).

The following conditions must be fulfilled, in addition to those set out in above:

• check the articles of the company – an own share purchase from capital must not be restricted or prohibited by the articles;
• see if the company has any distributable profits available to fund the purchase – if it does, those distributable profits (or funds from a fresh issue of shares for the purpose) must first be used to fund the own share purchase before capital can be used (s.710 CA 2006). The company’s capital (the ‘permissible capital payment’) may only be used if that company’s distributable profits are insufficient to fund the total cost of the purchase; and
• check that the accounts used to determine the distributable profits were prepared to a date no more than three months before the date of the directors’ statement given under s.714 CA 2006 (s.712(7) CA 2006).

Where distributable profits are being used wholly or partly to finance the purchase of shares, the amount of distributable profits available should be verified by the company’s accountants. Likewise, if the directors conclude that a payment should be made out of capital, this view should be verified by the accountants.

Provided that the above conditions have been fulfilled, the further documentation required to effect the payment out of capital is set out in s.713 CA 2006 and is as follows:

• a contract stating the terms of the purchase, including the price to be paid. An ordinary resolution to approve the contract is required (s.694(2) CA 2006);
• a written statement of solvency made by the directors of the company. By making this statement, the directors of the company are stating that they believe that the company is able to pay its debts as they fall due from the date immediately after the payment out of capital is made and that it will continue to be able to do so for a period of 12 months (s.714(3) CA 2006);
• an auditors’ report, which is annexed to the written statement of solvency (s.714(6) CA 2006); and
• a special resolution to approve payment out of capital, to be passed on (or within a week after) the same day as the directors sign the written statement of solvency (s.716(1),(2) CA 2006).

The procedure and timing for use of capital to fund an own share purchase is:

• A board meeting of the company purchasing its own shares must be held to call a general meeting on at least 14 clear days; notice (unless either the short notice or written resolution procedure is used). The contract to purchase must be made available for inspection by shareholders both (i) at the company’s registered office for at least 15 days ending with the date of the general meeting and (ii) at the general meeting (s.696(2)(b) CA 2006). This means that the general meeting cannot be held on notice which is shorter than 15 days. Where a written resolution is used, the 15-day requirement does not apply. Instead, a copy of the contract must be sent to each member at the same time as, or before, the written resolution is sent (s.696(2)(a) CA 2006).
• The directors’ statement and auditors’ report must be finalised on the day of (or within 7 days prior to) the general meeting (s.716(2) CA 2006).
• A general meeting must be held (unless the resolutions are to be passed as written resolutions), at which two resolutions are passed: one ordinary resolution to approve the contract and one special resolution to approve the use of capital. The selling shareholder can vote on the resolutions at a general meeting but if his votes in respect of the shares
  being sold carries either of the resolutions, it will be ineffective (ss. 695(3), 717(3) CA 2006). Therefore that shareholder should be advised to abstain – unless some, but not all, of his shares are to be purchased, in which case he may safely vote on a poll in respect of the shares that he is keeping. If the resolutions are passed as written resolutions that shareholder is disenfranchised for that vote (ss. 695(2), 717(2) CA 2006).
• Under s.719 CA 2006, the company must publish a notice in the Gazette within the week immediately following the date of the special resolution approving the payment out of capital. The notice must state:
  • that the company has approved a payment out of capital for the purpose of purchasing its own shares;
  • where the directors’ statement and auditors’ report are available for inspection; and
  • that any creditor of the company may, at any time within the five weeks immediately following the date of the resolution, apply to the court under s.721 CA 2006 for an order preventing the payment.

  Within the week immediately following the date of the special resolution, the company must also publish a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to that effect to each of its creditors (s.719(2) CA 2006).

  The company must (i) deliver a copy of the directors’ statement and auditor’s report to Companies House on or before the day its first notice is published and (ii) make those documents available to any shareholder or creditor of the company for inspection, without charge, from the day its first notice is published until five weeks have passed since the special resolution approving the payment out of capital (ss.719 and 720 CA 2006).

• The share purchase can take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s.723 CA 2006). This period cannot be reduced even if the special resolution is passed unanimously – the five week delay is designed to enable shareholders and/or creditors of the company to object to the payment out of capital by lodging an application at court for cancellation of the resolution (s.721 CA 2006). Shareholders who vote in favour of the resolution cannot object and so if the resolution is passed unanimously there can be no objection by the shareholders (although creditors can still object). The seven week longstop period is intended to ensure that the view formed by the directors in their statutory declaration as to the solvency of the company is still likely to be accurate at the time the share purchase is made.
• Within 28 days of the date on which the shares that are bought back are delivered to the company, the company must send a return to Companies House under s.707(1) CA 2006 and a notice of cancellation under s.708(1) CA 2006, together with a statement of capital (s.708(2) CA 2006).

NB: the requirements of s.714, s.716 and s.719 CA 2006 do not apply where a company wishes to finance an own share purchase for the purposes of or pursuant to an employees’ share scheme out of capital, as it can do so by special resolution together with a written statement of solvency made by the directors (s.713(2) and s.720A CA 2006). In other words, no auditors’ report is required and the special resolution must be passed within 15 days of the written statement of solvency.

No deferred payment after purchase of own shares

When the shares are purchased by the company, there is no ability to defer the payment of consideration on an own share purchase (s.691(2) CA 2006) (except where the purchase is for the purpose of or pursuant to an employees’ share scheme (s.691(3) CA 2006)). This is different to the position when redeemable shares are being redeemed.

General

Redeemable shares give the holder temporary membership in the company. They are issued as redeemable shares – they are to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder. All details of the redemption, including date of redemption and the price to be paid at that date, will either be in the articles or determined by the directors.

As a result, a contract is not required to redeem shares, irrespective of the source of funding used. This is because the terms of the redemption have already been set out in the company’s articles of association (or determined by the directors) prior to the shares being allotted.

Redemption out of profits or the proceeds of a fresh issue of shares

A company’s redeemable shares may be redeemed out of profits or the proceeds of a fresh issue of shares for the purpose of the redemption, if the following conditions are met:

• The articles of association of a private company may exclude or restrict the issue of redeemable shares (s 684(2) CA 2006).
• Under s.684(3) CA 2006 public companies are required to have an express authority in their articles to issue redeemable shares.
• The company must also have non-redeemable shares in issue at the time it issues redeemable shares (s.684(4) CA 2006). This is because if it did not, and the redeemable class of shares were redeemed by the company, the company would be left with no issued share capital.
• The shares to be redeemed must be fully paid up (s.686(1) CA 2006).
• The terms of the redemption must be set out in the articles (s. 684(4) CA 2006). The exception to this is that the articles, or an ordinary resolution, may provide that the directors can determine the redemption rights attaching to such shares (s. 685(1) CA 2006). If the directors determine the redemption rights, they must do so before the shares are allotted (s.685(3) CA 2006).
• No shareholder resolution is required under CA 2006.
• The redeemed shares are treated as cancelled (s.688 CA 2006).
• Notification must be sent to Companies House within one month of redemption together with a statement of capital (ss. 689(1), 689(2) and 685(3)(b) CA 2006).

Redemption out of capital

Only private companies are permitted to fund a redemption of their own shares out of capital (s.687(1) CA 2006).

The following conditions must be fulfilled in order for a redemption to be funded out of capital:

• check the articles of the company – a redemption from capital must not be restricted or prohibited by the articles (s.709(1) CA 2006);
• see if the company has any distributable profits available to fund the purchase – if it does, those distributable profits (or funds from a fresh issue of shares for the purpose) must first be used to fund the own share purchase before capital can be used (s.710 CA 2006). The ‘permissible capital payment’ (s. 710(2)) may only be used if that company’s distributable profits are insufficient to fund the total cost of the purchase; and
• check that the accounts used to determine the distributable profits were prepared to a date no more than three months before the date of the directors’ statement given under s.714 CA 2006 (see below) (s.712(7) CA 2006).

Where distributable profits are being used wholly or partly to finance the redemption of shares, the amount of distributable profits available should be verified by the company’s accountants. Likewise, if the directors conclude that a payment should be made out of capital, this view should be verified by the accountants.

Provided that the above conditions have been fulfilled, the further documentation required to effect the payment out of capital is set out in s.713 CA 2006 and is as follows:

• a written statement of solvency made by the directors of the company. By making this statement, the directors of the company are stating that they believe that the company is able to pay its debts as they fall due from the date immediately after the payment out of capital is made and that it will continue to be able to do so for a period of 12 months (s.714(3) CA 2006);
• an auditors’ report, which is annexed to the written statement of solvency (s.714(6) CA 2006); and
• a special resolution to approve payment out of capital – to be passed on (or within a week after) the same day as the directors sign the written statement of solvency (s.716(1),(2) CA 2006).

The procedure and timing for use of capital to fund a redemption of redeemable shares is as follows:

• A board meeting of the company must be held to call a general meeting on at least 14 clear days’ notice (unless either the short notice or written resolution procedure is used).
• The directors’ statement and auditors’ report must be finalised and signed on the day of (or within 7 days prior to) the general meeting (s.716(2) CA 2006).
• A general meeting must be held (unless the resolution is to be passed as a written resolution), at which a special resolution to approve the payment out of capital is to be passed. The shareholder whose shares are being redeemed can vote on the resolution at a general meeting but the resolution will be ineffective if his votes in respect of the shares being redeemed carry the resolution (s.717(3) CA 2006). Therefore that shareholder should be advised to abstain – unless some, but not all, of his shares are to be redeemed, in which case he may safely vote on a poll in respect of the shares that he is keeping. If the resolution is passed as a written resolution that shareholder is disenfranchised for that vote (s.717(2) CA 2006).
• Under s.719(1) CA 2006, the company must publish a notice in the Gazette within the week immediately following the date of the special resolution approving the payment out of capital. The notice must state:
• • that the company has approved a payment out of capital for the purpose of redeeming its own redeemable shares;
  • where the directors’ statement and auditors’ report are available for inspection;
  • that any creditor of the company may, at any time within the five weeks immediately following the date of the resolution, apply to the court under s.721 CA 2006 for an order preventing the payment.

Within the week immediately following the date of the special resolution, the company must also publish a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to that effect to each of its creditors (s.719(2) CA 2006).

The company must (i) deliver a copy of the directors’ statement and auditor’s report to Companies House on or before the day its first notice is published and (ii) make those documents available to any shareholder or creditor of the company for inspection, without charge, from the day its first notice is published until five weeks have passed since the special resolution approving the payment out of capital (ss.719 and 720 CA 2006).

• The redemption can take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s.723 CA 2006). This period cannot be reduced even if the special resolution is passed unanimously – the five week delay is designed to enable shareholders (who did not approve the resolution) and/or creditors of the company to object to the payment out of capital by lodging an application at court for cancellation of the resolution (s.721 CA 2006).

Shareholders who vote in favour of the resolution cannot object and so if the resolution is passed unanimously there can be no objection by the shareholders (although creditors can still object). The seven week longstop period is intended to ensure that the view formed by the directors in their statutory declaration as to the solvency of the company is still likely to be accurate at the time the redemption is made.

• The redeemed shares are treated as cancelled (s.688 CA 2006).
• Notification must be sent to Companies House within one month of redemption together with a statement of capital (ss. 689(1), 689(2) and 685(3)(b) CA 2006).

Deferred payment for redemption

When redeemable shares are redeemed by the company, the company must pay the selling shareholder for their shares at that time. Only if the terms of the redemption so specify may the shareholder agree with the company to be paid on a date later than the redemption date (s.686(2) CA 2006).