A company buying its own shares returns capital to some shareholders at the expense of the rest and of creditors. Division 4 of Part VI of the Companies Act 1997 therefore permits it only by defined routes.
Section 56 — and not otherwise
(1) A company may purchase or otherwise acquire any of its own shares under sections 57, 89 and 91 to 93 (inclusive), but not otherwise.
(2) A company may redeem a redeemable share in accordance with section 59, but not otherwise.
(3) A share acquired or redeemed is deemed to be cancelled immediately upon acquisition or redemption.
(4) Immediately following the acquisition or redemption, the company shall submit a notice in the prescribed form to the Registrar of the number and class of shares acquired or redeemed.
| Route | What it is |
|---|---|
| s 57 | An offer or agreement to purchase, authorised by the constitution — the ordinary buy-back |
| s 89 | Acquisition under a unanimous shareholder agreement |
| ss 91–93 | Minority buy-out rights — a shareholder requiring the company to purchase their shares |
| ss 59–62 | Redemption of a redeemable share |
Failure to file the section 56(4) notice is an offence by every director, with the penalty in section 414(2). Note also that an acquisition is a distribution, so the solvency test machinery in section 50 and the recovery provisions in section 54 apply.
Section 57 — the ordinary buy-back
A company may agree to purchase or otherwise acquire its own shares where it is authorised to do so by its constitution. Before it offers or agrees to do so, the board shall resolve that —
(a) the acquisition is in the best interests of the company; and
(b) the terms of the offer or agreement and the consideration to be paid are fair and reasonable to the company; and
(c) it is not aware of any information that has not been disclosed to shareholders which is material to an assessment of the value of the shares, and as a result of which the terms or consideration are unfair to shareholders accepting the offer.
The board must confirm it holds no undisclosed price-sensitive information that would make the offer unfair to those who accept. A board that buys shares from shareholders while sitting on good news the shareholders do not have cannot pass this resolution. Compare section 127, which restricts share dealing by directors and employees in possession of information.
Before an offer is made, the company shall send to each shareholder a disclosure document containing —
(a) the nature and terms of the offer, and if made only to specified shareholders, to whom; and
(b) the nature and extent of any relevant interest of any director in shares the subject of the offer; and
(c) the text of the section 57(2) resolution, with such further information and explanation as is necessary to enable a reasonable shareholder to understand the nature and implications of the proposed acquisition.
The offer must be made not less than 10 working days and not more than 12 months after the disclosure document has been sent to each shareholder.
Before making an offer, or entering an agreement, other than in a manner which leaves unaffected the relative voting and distribution rights of all shareholders, the board shall resolve that the making of the offer or entry into the agreement is fair to those to whom the offer is not made, or with whom no agreement is entered into.
A pro rata buy-back changes nobody’s relative position and does not need this. A selective buy-back — buying out one shareholder — does, because it shifts control among those who remain.
Sections 57A to 57C — treasury shares
(a) the constitution expressly permits the company to hold its own shares; and
(b) the board resolves that the shares shall not be cancelled on acquisition; and
(c) the number acquired, aggregated with shares of the same class already held under this section, does not exceed 5 per cent of the shares of that class previously issued, excluding shares previously cancelled under section 56(3).
The rights and obligations attaching to a share a company holds in itself shall not be exercised by or against the company. In particular the company shall not (a) exercise any voting rights attaching to the share, or (b) make or receive any distribution in respect of it.
So treasury shares cannot be used to vote in management’s favour, and cannot soak up dividends. The board may cancel them at any time by resolution under section 57A(3).
Section 57C governs re-issue. A transfer of a share held in itself is treated as an issue for the purposes of section 47 — so the consideration must be determined and certified. And the company shall not grant an option over, or agree to transfer, such a share where it has received written notice of a takeover offer under the Takeovers Code in force under the Securities Act 1997, or where a stock exchange has publicly released that a takeover offer for more than 20 per cent of the shares is to be made.
Section 58 — enforceability
(1) A contract providing for the acquisition by the company of its shares is specifically enforceable against the company except to the extent that the company would, after performing the contract, fail to satisfy the solvency test.
(2) The company has the burden of proving that after performance it would be unable to satisfy the solvency test.
(3) Until the contract is fully performed, the other party retains the status of a claimant entitled to be paid as soon as the company is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors but in priority to the other shareholders.
The selling shareholder gets specific performance, and the company must prove insolvency to resist it. But solvency still comes first: the company cannot be compelled to pay itself into insolvency. And if it fails, the unpaid seller sits behind creditors but ahead of shareholders — better than an ordinary member, worse than a creditor.
Sources
- Companies Act 1997 — ss 4, 43, 44A, 47, 50, 54, 56–58, 57A–57C, 59–62, 89, 91–93, 124, 127, 414
- Securities Act 1997
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.