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LPC Law Notes Business Law and Practice Notes

Buy Back Of Shares Procedure Notes

Updated Buy Back Of Shares Procedure Notes

Business Law and Practice Notes

Business Law and Practice

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Out of Profits or Fresh Issue p.200 Out of Capital Reduction in Capital

Overview

  • Shares are cancelled (s.706(b)(i))

  • Issued share capital decreases

  • Voting control may be altered

  • Create/increase a capital redemption reserve

  • Reduce share premium account (if any paid on buy-back or financed by a fresh issue)

Overview

  • Offends maintenance of capital

  • It is an exception (see the notes)

  • Expensive (advertise, auditors…)

  • Protracted and lengthy

  • Statement of solvency required

  • Creditors may potentially bring court action under s.721 to cancel the buy-back

Overview

  • Only for private company (s.641)

  • Reclassify shares into profit

  • Existing share capital is treated as decreasing (decrease is ‘distributable profit’)

  • Avoids delay and expense of a buy-back out of capital

Conditions

Permissible under s.692(2) if:

  1. Co.’s Articles don’t prohibit it (s.690(1))

  2. Shares are fully paid (s.691(1))

  3. Shares are paid for by the Co. at the time of purchase (s.691(2))

A contract is entered with the S’holder whose shares are being bought. This contract must be approved by the S’holder by SR at GM or WR (s.694(2))

Conditions

Permissible under s.709(1) if:

  1. Articles don’t prohibit it (s.690(1))

  2. Shares are fully paid (s.691(1))

  3. Shares are paid for by the Co. at the time of purchase (s.691(2))

  4. Auditors prepare a report stating they know no grounds that would prevent Ds from making statement

  5. Ds make a statement of Co.’s solvency for the next 12 months (s.714) at least 1 week before the GM (s.716)

If Co. is wound up as a result of a faulty D’s Statement within 1 year Ds and Seller are financially liable s.76 IA 1986. Ds’ subject to criminal sanctions under s. 715 for breach of s.714

Same Contract

Conditions

Permissible if:

  1. Articles do not prohibit the reduction in share capital (s.641(6))

  2. Ds make a statement of solvency (s.642(1)) about the next 12 months (s.714) at least 1 week before the GM (s.642(1)(a))

If Co. is wound up within 1 year Ds and Seller are financially liable s.76 IA 1986. Ds’ subject to criminal sanctions

Before the BM

  1. Check the Articles for a restriction on the power to buy-back under s.690 (MA silent; TA35 permits)

  2. Check shares are fully paid (s.691)

  3. Check accounts within 3 months to ascertain available profits

Before the BM

  1. Check the Articles for a restriction on the power to buy-back under s.690 (MA silent; TA35 permits)

  2. Check shares are fully paid (s.691)

  3. Check accounts within 3 months to ascertain available profits

  4. Commission an auditor’s report and make a statement of solvency

 N/A

Call, Notice, Declaration, Quorum, Voting of the BM

  • See the relevant Procedure table (MA or TA)

  • Apply to the facts: who must attend and declare?

BM1

  • Discuss the engagement of the Ds’ duties, particularly s.172

  • Is it fine to go ahead with it?

  • The board resolves to:

    1. Approve the terms of the buy-back contract (s.694(2))

    2. Make contract available for inspection/annex it to the WR

    3. Propose a GM/WR

  • Apply to facts: do they pass? Who needs to vote?

BM1

  • Discuss the engagement of the Ds’ duties, particularly s.172

  • Discuss the solvency statement

  • Is it fine to go ahead with it?

  • The board resolves to:

    1. Approve the statement of solvency (s.714)

    2. Make the buy-back out of capital (and profits?) (s.716(1))

    3. Approve the terms of the buy-back contract (s.694(2))

    4. Make contract available for inspection/annex it to the WR

    5. Propose a GM/WR

  • Apply to facts: do they pass? Who needs to vote?

BM1

  • Discuss the engagement of the Ds’ duties, particularly s.172

  • Discuss the solvency statement

  • Is it fine to go ahead with it?

  • The board resolves to:

    1. Approve the terms of the buy-back contract

    2. Make contract available for inspection/annex it to the WR

    3. Approve the statement of solvency (s.714)

    4. Propose a GM/WR

  • Apply to facts: do they pass? Who needs to vote?

Call, Notice, Declaration, Quorum of the BM

  • See the relevant Procedure table (MA or TA)

  • Apply to the facts: who must attend?

GM/WR

GM:

Make the contract available at least 15 days prior to the GM and at the GM itself (s.696(2)(b))

WR:

Circulate the contract with the WR or before it (s.686(2)(a))

Resolutions:

  1. OR to approve the contract to buy-back out of profits

  2. If by WR, approve to circulate the WR

Voting:

  • GM: the member who his selling his shares back cannot vote if the OR would not have passed without their consent (s.695(3))

  • WR: cannot participate in the WR at all (s.695(2))

GM/WR

GM:

  1. Make the contract available at least 15 days prior to the GM and at the GM itself (s.696(2)(b))

  2. Auditor’s report and statement of solvency must be at the GM itself (s.718(2)(a))

WR:

  1. Circulate the contract with the WR or before it (s.686(2)(a))

  2. Auditor’s report and statement of solvency must be circulated with the WR (s.718(2))

Resolutions:

  1. OR to approve the contract to buy back the shares (s.694(2))

  2. SR to approve using the payment out of share capital to buy shares (s.716(1))

  3. If by WR, approve to circulate the WR

Voting:

  1. GM: the member who his selling his shares back cannot vote if the OR would not have passed without their consent (s.695(3)) and (s.717(3))

  2. WR: cannot participate in the WR at all (s.695(2)) and (s.717(2))

GM/WR

GM:

Solvency statement to be available at the GM itself (s.642(3)(b))

WR:

Annex the solvency statement with the WR or before it (s.642(2))

Resolutions

  1. OR to approve the reduction in share capital (s.641(1)(a))

  2. If by WR, approve to circulate the WR

Administration (or do at end)

  • Keep copy of board minutes for 10 years (s.355)

  • [Keep copy of WR for 10 years (s.248)]

Administration (or do at end)

  • File the...

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