What is a share buy-back?

 

A share buy-back is largely as described - it occurs when a company seeks to purchase its own shares from one of its shareholders.

Visit our corporate law pages to learn more about the relationship between companies and their shareholders.

Legal mechanism

Share buy-backs are complex, and should only be attempted with legal advice and support from an experienced company and commercial lawyer. They can occur in two different ways:Most commonly, the company buys back its own shares on the open market, and does so with the authorisation of its shareholders

  • Less commonly, a company can put out an offer to tender, effectively asking all shareholders to submit a price at which they would be willing to sell

The effect of a share buy-back is that the shares cease to exist and can no longer be traded.

The process for a share buy-back is regulated by provisions in the Companies Act 2006, and if the business is listed there are also stock exchange rules to be followed.

The rules state that the terms for purchase must be agreed by at least 75% of the qualifying other shareholders who attend the vote and a copy of the contract for purchase must be made available by company lawyers within fifteen days of the vote.

Purpose and benefits

There are many reasons why a firm may decide to do this. The principle one is excess cash. When businesses have too much excess cash, and no need for further investment, a buy-back is a good option which can have a multitude of advantages especially in relation to taxation.

Share buy-backs are typically financed by profits from trading or from the proceeds raised by the issue of new shares to other shareholders.

Share buy-backs are essentially good for shareholders. The reasons are numerous but in its simplest form, fewer shares automatically means the price of those which remain should go up. In addition, a buy-back is a sign of strength in the business’s trading, and should signal to other investors that this is a stock to buy, further driving the price upwards.

If you are involved in a buy-back, whether as a business or an investor, it is important to receive proper legal advice to ensure your interests are being looked after.

Contact Law can put you in touch with a cost effective company and commercial solicitor free of charge. Please call us on 0800 1777 162 or complete the web-form above to speak to an advisor.

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