(Sections 684-723, 733-737 CA 2006)
There are two types of situation when a company can effectively buy its own shares:
- redemption of redeemable shares; and
- purchase of own shares.
One reason a company may wish to do this is that (in a private company) a shareholder may want to leave and cannot find a buyer for their shares. Shareholders in private companies are prohibited from offering their shares to the public. In order to prevent a shareholder being locked into the company with no way to sell his shares, the company can purchase or redeem the shares. However, because of the principle of the maintenance of share capital, there are very strict controls on the purchase or redemption of a company’s shares. Both private and public companies may purchase their own shares or redeem redeemable shares provided they comply with the provisions of CA 2006. Only private companies can use capital to fund a purchase of its own shares or a redemption of redeemable shares.
A company can raise funds for a redemption of redeemable shares or a purchase of its own shares in one of three ways:
- distributable profits (s.687(2)(a), 692(2)(a)(i) CA 2006);
- a fresh issue of shares for the purpose of the redemption or the purchase (s.687(2)(b), 692(2)(a)(ii) CA 2006) – but note that there are limits on using these funds to finance repayment of the premium; or
- capital (s.687(1), 692(1) CA 2006).
Note that, the option of using capital is only available to private companies (ss.687(1), 692(1) and 709(1) CA 2006). A public company can never use capital to purchase its own shares. Also any redemption or purchase out of capital must comply with the restrictions in Chapter 5 of Part 18 CA 2006, i.e. ss 709 – 723 CA 2006 inclusive unless it is a purchase which falls within the scope of the de minimis provisions set out in s.692(1ZA) (which are available only for smaller share purchases and not for redemption.