Buy-back of Shares
The Royal Bank of Scotland recently announced that it intended to buy-back part of its issued share capital. This raises two important questions – why and how?
Why would you buy-back shares?
A company may seek to buy-back shares if an existing shareholder wishes to sell his shares when either no third party can be found to purchase them or the other shareholders wish to purchase them but cannot afford to do so. An example of this would be a family company in which one family member wants to sell his stake. A buy-back can also be a useful mechanism for a joint venture partner to crystallise its investment or to buy out a dissatisfied or troublesome shareholder when there is no ready purchaser for such shares.
In cases such as RBS however, shares can also be bought back by a company to return capital to investors and in order to increase the value of shares held by the remaining shareholders. This is because the value of the company remains the same, but the percentage of the company held by the remaining shareholders increases (due to the reduced number of shares over which the value is spread). Therefore, the value of each share increases.
There are also tax implications of a share buy back (including stamp duty) so it is important to seek tax and accounting advice before deciding that a share buy-back is appropriate.
The Procedure
A company limited by shares may only purchase its own shares if it is authorised to so by its Articles of Association and must then comply with various statutory provisions contained in the Companies Act 1985. In the case of RBS, as this is a company which is quoted on the London Stock Exchange it will also have to follow the Listing Rules. (This article will not cover the buy back of shares by a listed company.)
The terms upon which the shares are to be purchased must be approved by all the shareholders (except from the shareholder whose shares are being purchased). This is done by the company passing a special resolution which requires the consent of the holders of at least 75% of the issued shares which carry the right entitled to vote at general meetings. It is worth noting that if a shareholder does not attend the general meeting then his vote does not count (unless a proxy is exercised) – the special resolution requires the consent of 75% of those shareholders who actually attend and vote at the meeting on the resolution.
A copy of the contract for the purchase of the shares (or if it is not in writing then a memorandum setting out the terms of the contract) must be made available for inspection by the other shareholders of the company at the company's registered office for not less than 15 days prior to the day of the meeting and at the meeting itself.
The names of any shareholders holding shares in the company to which the contract relates must be stated on the memorandum or, if they are not clear from the contract, by a memorandum annexed to such contract.
A special resolution is also required if the company intends to enter into a contact or option to purchase its own shares, whether the right is of the company or the seller to require the sale of shares to proceed. The consideration for such a contract (or for its alteration, variation or termination) must be made from distributable profits of the company.
How does the Company pay for such shares?
The Companies Act provides that a company may only purchase its own shares:-
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from distributable profits of the company, or
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out of the proceeds of a fresh issue of shares made for the purposes of the purchase, or
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out of their capital. This, however, is only available to private companies and is a complicated procedure and shall not be dealt with in this article.
In some instances a premium is to be paid on the redemption (buy-back price) and if so then again this must be paid from distributable profits of the company. However, if the shares were issued at a premium then any premium payable on their purchase may be paid from the proceeds of a fresh issue of shares made for that redemption up to the amount which is the lesser of the premiums received on the issue of shares being purchased or the current amount of the company's share premium account (including sums paid as a premium for the new shares).
Shares which are purchased by the company are treated as cancelled and whilst the amount of the authorised share capital is not affected, the issued share capital is reduced. The shares which have been purchased may be re-issued as if those shares had not been issued, subject to the directors having authority to do so and the terms of the company's articles.
As you can see, the process for a company buying its own shares can be complex.
For further information please contact: Scott Kerr