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Share buy backs - what’s the fuss?

13 December 2018

When a company is planning a share buy back (or purchase of its own shares) it’s time to be careful. This note explains why you need to be careful, and summarises the company law issues that must be addressed in advance before the company enters into any commitments.

As more companies are incentivising employees by issuing shares directly to them and a private company would usually want to sever all relations with a departing employee, buy backs are becoming more common. This note focuses on buy backs by English incorporated private companies, particularly from departing employees.

What’s behind all this fuss?

The general rule is that a company must not purchase its own shares save in certain limited circumstances. Those limited circumstances involve the company meeting certain conditions and completing certain procedures.

Enshrined in company law is the principle of maintenance of capital which this general rule reflects. Once a shareholder has subscribed for shares issued to him by the company, the company’s share capital represented by those shares must be preserved. Strict rules apply when a company wants to reverse that step.

Those strict rules do not apply when a shareholder transfers his shares in the company to another (although transfers of shares may be subject to other controls). A share transfer may not be a practical option for a departing employee if, for example, the other shareholders cannot, or do not wish to, buy his shares...

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