Own Share Purchase Out Of Profits/New Share Issue/Cash – Contract to Purchase (ESS)

Companies may wish to “buy back” or purchase their own shares.

Use this contract for an employees’ share scheme buyback

This Own Share Purchase Out of Profits/New Share Issue/Cash – Contract to Purchase (ESS) is for a private company purchasing its own shares for the purposes of an employees’ share scheme.

The purchase may be funded using distributable profits, the proceeds of a new issue of shares, or cash.

It should be read in conjunction with “Own Share Purchase Out of Profits/New Share Issue/Cash – Guidance Notes.”

Legal requirement for a valid contract and approval route

In order for a private limited company to purchase its own shares, there must be a valid contract for the purchase of shares.

• Either an ordinary resolution must be passed approving the contract; or
• An ordinary resolution must approve multiple buybacks for the purposes of an employees’ share scheme.

What the contract covers

This contract includes clauses dealing with:

• Definitions.
• Sale and purchase of the sale shares.
• Representations and warranties of the vendors.
• Representations and warranties of the purchaser.
• Miscellaneous provisions.
• Notice details.

Key details and ESS-specific points covered by the template

• The company purchasing the shares will be the purchaser, and its details will need to be completed at section 1.
• The document caters for up to three vendors, although more can be added in Schedule I. If more are added, their names must be added to the cover sheet and they must be given boxes for their signatures on page 7.
• If any or all of the vendors are not individuals, then the requirements for signature will have to comply with that body’s authorised signature requirements. The agreement is a simple contract, not a deed, and so the signatures do not require a common seal or a witness.
• The nominal value of the share referred to in Recitals A and B is the value of each share on the share certificate. This may be only a small amount (for example 1p, 10p or £1) and may be considerably less than the price paid per share. If the price paid per share is more than the nominal value, then the balance is referred to as the premium.
• Clause 2.2 (Completion Date) needs to be amended according to whether there is an ordinary resolution approving the individual contract or an ordinary resolution approving multiple buybacks for the purposes of an employees’ share scheme.
• Clause 2.4 gives the option of paying the purchase price in instalments. The ability to pay in instalments was introduced in April 2013 and only applies to purchases for the purposes of an employees’ share scheme.
• If the vendor is a corporate body, then clause 3.4 should be retained; otherwise it should be deleted.
• Details for giving notice to each of the parties to the contract should be inserted at clause 6.
• The share capital of the company purchasing its own shares immediately before completion of the sale and purchase should be inserted at Schedule II, and the share capital of the company purchasing its own shares immediately after completion should be inserted at Schedule III.

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