Treasury Shares – New rules for Share Buybacks for Private Companies

Before the enforcement of the Buyback Regulations 2013, private companies may only purchase their own shares by using the distributable profit of the company.

Since the enforcement of the Buyback Regulation, shares can now be transferred into treasury where they have been purchased by a company out of distributable profits or using the Cash De Minimis exemption.

The Buyback Regulations 2013 relaxed the administrative burden of share buybacks for private companies. The changes introduced can be summed up as following:

• A reduction in the level of shareholder consent required to approve a buyback contract
• It extends the methods to finance a buyback to include the new ‘Cash De Minimis’ exemption (it enhances the ability for a company to manage the company share capital with or without distributable reserves, to fund the share buyback for a cash consideration up to the lower of £15,000 or 5% of its share capital in each financial year)
• Private companies may hold shares in treasury. (The ability to hold treasury shares was a right previously only available to qualified shares in listed companies).
• The treasury shares can be held indefinitely and can be cancelled at any time.
• Private companies can take advantage of the use of treasury shares in satisfying the exercise of employee share options without the cost or administrative burden of an employee benefit trust (“EBT”). Shares can be bought back from former employees and held in treasury pending redistribution to new employees under an employee share scheme.

What are treasury shares?

Treasury shares are used as a form of ‘storage’ so that shares which have been bought back can be held by the company and then transferred or sold at a later date, rather than cancelled. The pros of holding shares in treasury are that there is no change to the amount of the company’s share capital, thus no amount is transferred to the capital redemption reserve.

Holding treasury shares

Where a company’s shares are held in treasury, the name of the company must be entered in the register of members and to inform the Registrar with regards to the creation of the treasury shares. Whilst the company is entitled to hold treasury shares in order prevent share dilution, the company cannot exercise any other rights attached to the treasury shares such as the following:

• voting rights
• right to dividends, or
• right to capital distributions

Tax considerations of treasury shares

(a). Stamp Duty

For stamp duty purposes, a company purchasing shares into treasury is liable to pay stamp duty at 0.5% (unless the price is £1,000 or less). The stamp duty treatment is the same as if the shares were cancelled following a buyback.

(b). Share Transfer

If the company chooses to sell the shares, it must do so for ‘cash consideration’. Transfers of treasury shares without consideration are only permitted if it is for the purposes of an employees’ share scheme.

For tax purposes, any Shares sold or transferred out of treasury are treated as if they have been newly issued. Therefore, there is no stamp duty charge on the subsequent sale or transfer of the treasury shares.

Comments

The new rules introduced by the Buyback Regulations 2013 certainly enhance private companies’ abilities to manage their share capital. However it is important to note that the share buybacks by companies must comply with the Companies Act 2006 and the company’s articles of association namely the articles must not prohibit the transfer into treasury, any rights relating to pre-emption must be observed and the detailed statutory procedures for buyback of shares must be followed.

If you are unsure of the changes made by the Buyback Regulations, or would like advice in respect of share buyback by private companies, Archers have specific expertise in this area in its corporate team.

For further advice or assistance, please contact info@archerscs.co.uk