Share buy backs by your company

Always take legal advice if it is proposed to buy back shares from a shareholder. The procedures have to be followed strictly or the buy back will be unlawful.

The shares bought back by the company are treated as cancelled - the authorised share capital remains the same, but the issued share capital is reduced (by the nominal or 'face' value of the shares bought back).

This means a buy back can be useful as an exit route from a private company if the remaining shareholders do not wish to (or cannot afford to) buy the shares of a retiring shareholder, but do not wish shares to go to an outsider. After the buy back, they are left in sole control of the company.

It can also be useful if there is a dispute between shareholders. If the company can buy back one of the party's shares, it leaves the company in the control of the remainder, and removes the personal element that can arise if neither side wants to pay money to, or accept money from, the other for the shares.

This also means that the value of the remaining issued shares goes up on a buy back. A buy back can therefore be a useful way of keeping remaining shareholders happy in a public company.

In some circumstances the money paid to the shareholder on the buy back is taxed as a dividend, in others capital gains tax may apply as if the shares were being sold to a third party. The company and shareholder can often agree how they want the buy back to be taxed, and an application can be made for clearance from HM Revenue and Customs, so the tax consequences are known before the buy back takes place.

The flowchart assumes the buy back will be funded from the company's retained profits. If you do not have any (or enough) profits available, you may still be able to carry out a buy back, using 'capital', or issuing fresh shares and using the proceeds to fund the purchase. Both are complex - seek advice if you need to consider either option. Also seek advice if you are a public company wishing to create Treasury shares following a buy back of your 'qualifying shares'.