Own Share Purchase Out Of Profits/New Share Issue/Cash – Guidance Notes
Private limited companies can buy their own shares. This is when a company purchases shares in itself from an existing shareholder and the shares purchased are not redeemable shares. This may be out of profits, out of the proceeds of a fresh/new issue of shares, using cash (in limited circumstances), or out of capital. These are so called "off market purchases", and do not apply to public companies (market purchase).
These Guidance Notes deal with the procedure that must be followed for Share Buybacks out of profits, a new share issue or cash. Alternative Guidance Notes for the purchase of shares out of capital can be downloaded from Own Purchase Out of Capital.
A complete set of templates with Guidance Notes are available for redemption of redeemable shares at Redemption of Shares out of Profits and Redemption of Shares out of Capital.
Legal Compliance
These Share Buyback out of Profits Guidance Notes provide a step by step narrative on the strict company law procedures to ensure compliance with the Companies Act 2006, reflecting April 2013 Regulations and the changes made to the share buyback process by the Companies Act 2006 (Amendment of Part 18) Regulations 2015.
Drafted by experienced corporate lawyers, they have been most recently updated to reflect the July 2021 introduction by HMRC of mandatory electronic Stamp Duty processes to replace their previous physical stamping system.
What do these Share Buyback out of Profits Guidance Notes provide?
This template is a procedural guide for UK private companies carrying out an off market purchase of their own shares (out of profits) including under an employee share scheme. It explains the principle of maintenance of share capital and why strict rules apply, distinguishing between non-redeemable and redeemable shares; sets out the pre-conditions of share buybacks; and financing rules as well as the step-by-step procedure.
Step 1: Board Resolutions – to propose & approve the purchase. The draft contract to purchase and the draft ordinary resolution are produced and following receipt of shareholder approval (by written resolution or in general meeting per Step 3 below), the board approves the purchase, Share Buyback Resolution (with special rules if buying from a director or under an employee share scheme Share Buyback Resolution ESS).
Step 2: Contract to Purchase – Written contract Share Buyback Contract (or memorandum of terms) made available to members. This will either be sent to members with a copy of the written resolution (at the time of the board meeting) or made available for inspection at least 15 days ahead of the general meeting; Share Buyback Contract ESS for multiple buy-backs if linked to an employee scheme.
Step 3: Shareholder Approval – Ordinary resolution required to approve the terms of the contract. This may be passed by using either General Meeting Minutes or Written Shareholder Resolution. The selling shareholder may not vote. Versions also available for Employee Share Scheme buybacks.
Step 4: Post-approval – Send copies of certain resolutions to Companies House using Share Buyback Letter, especially for multiple buy-backs in employee schemes using Share Buyback Letter ESS.
Step 5: Statutory Forms & Stamp Duty
- File SH03 (return of purchase of own shares) within 28 days.
- Pay stamp duty (0.5% over £1,000).
- File SH06 if shares are cancelled.
- Shares bought with the de minimis cash exemption must be cancelled (cannot be held in treasury).
Step 6: After Completion – Keep contract for 10 years, update share capital, adjust capital redemption reserve if needed.
The process for Share Buybacks is technical; non-compliance can render the buy-back void. If in doubt seek specialist legal/tax advice.
Own Share Purchase Out Of Profits/New Share Issue/Cash – Guidance Notes is part of Corporate. Just £38.50 + VAT provides unlimited downloads from Corporate for 1 year.