Changes to the Companies Act introduced in 2013 sought to simplify the regulatory regime for share buybacks. One of the principal changes was to allow private companies to make small buybacks for cash without the need for distributable reserves (the “Exemption”). Unfortunately, the 2013 amendments created some legal and accounting uncertainties. New regulations coming into force in April resolve those concerns, although the codification of existing guidance on the financial limits applicable to the Exemption mean that its use will continue to be limited.
Background: encouraging employee ownership
An exemption of this kind was recommended by the Nuttall Review on Employee Ownership, which found that many small companies struggled with the complexities of the buy back regime and that this was in turn hindering employee share ownership – companies didn’t feel there was a simple way to recover shares from departing employees. Other changes introduced in 2013 included allowing deferred and instalment payments for buybacks made in connection with an employees’ share scheme, and the ability for shareholders to give general authority for buybacks in connection with such schemes.
The Exemption is currently set out in section 692 Companies Act 2006, and specifies the maximum purchase price for shares acquired under the Exemption in any financial year. This is currently limited to the lower of £15,000 and “the value of 5% of its share capital”.
The problem with the current rules
The second limb of the test met with criticism on its introduction as it was unclear what “value” meant in this context. Nor was it clear whether share premium should be included (on a strict reading, it shouldn’t but it left many scratching their heads given the disparity – in many cases – between nominal values and the company’s overall capital reserves). Equally, the accounting treatment of buy backs made under the Exemption was unclear. This led to the Government publishing guidance on the Exemption in November 2013 (the “Guidance”). The Guidance has now been largely codified by the draft Companies Act 2006 (Amendment of Part 18) Regulations 2015 (the “Regulations”), with one key change.
- amend the aggregate purchase price test to clarify that the annual limit is the lower of (i) £15,000 and (ii) 5% of the company’s paid up nominal share capital as at the beginning of the relevant financial year;
- align the accounting treatment for purchases made under the Exemption with purchases made out of capital under Chapter 5 of Part 18 of the Companies Act 2006 by extending section 734 Companies Act 2006: and
- provide that shares purchased under the Exemption may not be held in treasury (again, aligning the treatment with shares purchased out of capital).
Previously, the Guidance said that shares purchased under the Exemption may only be purchased for nominal value (as the Companies Act 2006 did not provide for buy backs at a discount or premium to nominal value). By bringing buy backs under the Exemption within section 734 (which deals with that situation for buy backs out of capital), purchases at discounts or premiums to nominal value can be effected (subject to the annual purchase price cap). This change will give the Exemption greater practical application than has been the case to date, although the restriction imposed by the aggregate purchase price test will, for many, substantially limit use of the Exemption.