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Company share buy-backs

30 March 2023

Company share buy-backs are also commonly known as a company purchase of own shares. A company may decide to buy back their shares for a number of reasons including to return cash to shareholders or to provide for a shareholder exit.

Understanding Share Buy-Backs

Share buy-backs, also known as a company’s purchase of its own shares, are a common practice in the business world. Companies often decide to buy back their shares for various reasons. These can include returning cash to shareholders or facilitating a shareholder’s exit.

The transaction involves two parties: the company that purchases the shares and the shareholder who sells them. The company must adhere to specific legislation that allows it to purchase its own shares, provided its Articles of Association authorise it to do so. According to HMRC’s guidance, the terms of the purchase must stipulate immediate payment to be valid.

Private and Public Companies: Different Rules Apply

For a private company limited by shares, the process of purchasing its own shares involves passing an ordinary resolution. This resolution must include statements by directors and an auditor’s report confirming the company’s solvency. The company can provide financial assistance for the purchase of its own shares, as long as it does not result in an unlawful reduction of capital.

On the other hand, a public limited company has a different set of rules to follow. They need to apply for court approval for capital reduction. Furthermore, the Companies Act 2006 (CA06) prohibits them from providing financial assistance for the purchase of their own shares. This distinction between private and public companies is crucial to understand when considering share buy-backs. It ensures that the company adheres to the law and protects the interests of its shareholders.

Source: HM Revenue & Customs Tue, 28 Mar 2023 00:00:00 +0100

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