Own Share Purchase Out Of Profits/New Share Issue/Cash – Guidance Notes

Private limited companies can buy back their own shares by purchasing them from an existing shareholder, where the shares purchased are not redeemable shares.

This can be funded out of profits, out of the proceeds of a fresh/new issue of shares, using cash (in limited circumstances), or out of capital. This document relates to “off market purchases” and does not apply to public companies (market purchases).

When to use these Guidance Notes

These Guidance Notes deal with the procedure that must be followed for share buybacks out of profits, a new share issue, or cash.

Alternative Guidance Notes for the purchase of shares out of capital can be downloaded from Own Purchase Out of Capital.

A complete set of templates with Guidance Notes are available for redemption of redeemable shares at Redemption of Shares out of Profits and Redemption of Shares out of Capital.

Legal compliance and updates covered

These Share Buyback out of Profits Guidance Notes provide a step by step narrative on the strict company law procedures to ensure compliance with the Companies Act 2006.

They reflect the April 2013 Regulations and the changes made to the share buyback process by the Companies Act 2006 (Amendment of Part 18) Regulations 2015.

They have been most recently updated to reflect the July 2021 introduction by HMRC of mandatory electronic Stamp Duty processes to replace their previous physical stamping system.

What the Guidance Notes cover

This template is a procedural guide for UK private companies carrying out an off market purchase of their own shares (out of profits), including under an employee share scheme.

It explains the principle of maintenance of share capital and why strict rules apply, distinguishing between non-redeemable and redeemable shares. It also sets out the pre-conditions for share buybacks, financing rules, and the step-by-step procedure.

• Board resolutions to propose and approve the purchase, including special rules where the buyback is from a director or under an employee share scheme.
• A written contract (or memorandum of terms), made available to members, including an employee share scheme version for multiple buy-backs linked to an employee scheme.
• Shareholder approval by ordinary resolution, whether by written resolution or in a general meeting, and the restriction that the selling shareholder may not vote.
• Post-approval steps, including sending copies of certain resolutions to Companies House (with an employee share scheme version for multiple buy-backs).
• Statutory forms and stamp duty, including filing SH03 within 28 days, paying stamp duty (0.5% over £1,000), filing SH06 if shares are cancelled, and the rule that shares bought with the de minimis cash exemption must be cancelled and cannot be held in treasury.
• After completion actions, including keeping the contract for 10 years and updating share capital, and adjusting the capital redemption reserve if needed.

Important practical point

The process for share buybacks is technical; non-compliance can render the buy-back void. If in doubt seek specialist legal/tax advice.

Own Share Purchase Out Of Profits/New Share Issue/Cash – Guidance Notes is part of Corporate. Just £38.50 + VAT provides unlimited downloads from Corporate for 1 year.