Many private companies have often looked to purchase their own shares as a way of returning surplus cash to shareholders or to facilitate the exit of a shareholder.
However, we are now starting to see more private companies looking to buyback shares as a means of managing share capital.
Regulations introduced last year relaxed the administrative burden of buybacks for private companies. They included a reduction in the level of shareholder consent required to approve a buyback contract and extending the methods to finance a buyback to include the new 'cash de minimis' exemption (essentially the ability for a company, with or without distributable reserves, to fund the buy back out of cash up to the lower of £15,000 or 5% of its share capital in each financial year).
The regulations also introduced the ability for private companies to hold shares in treasury - a right previously only available to listed companies.
What are treasury shares?
Treasury shares are used as a form of 'share 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. Whilst the shares are held in treasury, there is no change to the amount of the company's share capital and no amount is transferred to the capital redemption reserve.
Shares can only be transferred into treasury where they have been purchased by a company out of distributable profits or using the cash de minimis exemption. There is no limit on the number of shares a private company can hold in treasury.
There are several advantages of treasury shares, including the ability to restore the distributable profits used in the buyback on a subsequent sale of those shares.
Private companies can now also 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 leaving or former employees and held in treasury pending redistribution to new employees under an employee share scheme.
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 as the member holding the shares. Whilst the company is entitled to keep any bonus shares which it may be allotted in relation to the treasury shares in order prevent dilution, the company cannot exercise any other rights attached to the treasury shares, including in relation to:
- dividends, or
- capital distributions
The treasury shares can be held indefinitely and can be cancelled at any time.
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.
Sale / transfer of treasury shares
If the company chooses to sell the shares, it must do so for 'cash consideration'. Transfers of treasury shares, where no consideration is paid, are only permitted if they are pursuant to, or for the purposes, of an employees' share scheme.
Shares sold or transferred out of treasury are treated, for tax purposes, as if they have been newly issued. Generally, therefore, there is no stamp duty charge on the subsequent sale or transfer of the treasury shares - another advantage over use of an EBT, which would attract stamp duty on the transfer of shares from the EBT to the employee.
The new rules relating to share buybacks are already helping private companies manage their share capital. However it is important to remember that all buybacks have to comply with the Companies Act 2006 and the company's articles of association. In particular, 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.
For further information on the buyback procedure, see our article here and do get in touch if you have any questions.