Own Share Purchase Out Of Profits/New Share Issue/Cash - Contract To Purchase
This Own Share Purchase Out of Profits/New Share Issue/Cash – Contract to Purchase is the second step required for a private company wishing to buy back its own shares using distributable profits, the proceeds of a new issue of shares, or cash.
It should be read in conjunction with Share Buyback Out of Profits Guidance Notes.
Legal compliance for an own share purchase contract
In order for a private limited company to purchase its own shares, there must be a valid contract for the purchase of shares.
It is part of a procedure stipulated by the Companies Act 2006, and reflects the April 2013 changes to the Companies Act 2006, notably the move from special resolution to ordinary resolution for approval of the contract.
Provision to shareholders of a copy of the contract to purchase (or, if verbal, a memorandum of its terms) is governed by different rules depending on the method by which the contract is approved (Step 3).
What the contract covers
This Contract to Purchase contains 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.
- Schedules I to III covering the vendors, the number of shares sold and purchase price, pre-completion share capital, and post-completion share capital.
Key details and variants covered by the template
The company purchasing the shares will be the purchaser, and its details need to be completed at section 1.
The document caters for up to three vendors, although more can be added in Schedule I.
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.
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.
Schedule I should list the vendors’ names, number of shares and price of the shares. 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.
Other templates used in the overall procedure
Prior to completing this Share Buyback Contract to Purchase, Step 1 should be carried out: a board meeting and minutes presenting the proposal for the share buyback, producing the draft contract and draft approval resolution, and resolutions recommending the buyback and instructing the availability of the contract for inspection.
Step 2: This Contract To Purchase, as amended for the proposed transaction. Specific compliance requirements apply to circulation and availability of the contract to shareholders depending on the method of approval.
Step 3: Shareholder Approval – Ordinary resolution required; voting restrictions for the selling shareholder, by either General Meeting Minutes or Written Shareholder Resolution.
Step 4: Post-approval – Send copies of certain resolutions to Companies House using Share Buyback Letter.
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); and file SH06 if shares are cancelled.
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