Update by Ana-Maria Badeanu, Company and Commercial Solicitor
Share buybacks are a commonly used corporate tool for managing a company’s share capital. Whether you’re a business owner considering a buyback, a shareholder being offered a buyback opportunity, or a professional advising clients, understanding how buybacks work under UK law is important. In this update, I explore some commonly raised questions relating to share buybacks.
What is a share buyback?
A share buyback is when a company buys back its own shares from shareholders. The repurchased shares are usually cancelled (reducing the company’s share capital) or, in some cases, held in treasury.
Why would a company do a share buyback?
Companies carry out buybacks for a variety of reasons, including:
- Allowing shareholders to exit the company.
- Returning surplus cash to shareholders.
- Simplifying the shareholder register.
- Facilitating retirement or exit of founders/directors.
- Managing employee share schemes.
- Improving financial ratios (e.g. earnings per share).
Are share buybacks legal in the UK?
Yes but they are strictly regulated under the Companies Act 2006. Specific legal procedures and requirements must be followed for the buyback to be valid.
Can any company do a share buyback?
In general:
- Private limited companies (Ltd) can carry out buybacks if permitted under their Articles of Association and subject to the Companies Act 2006 rules.
- Public limited companies (PLC) have additional restrictions.
- The company must be solvent and able to fund the buyback lawfully.
What are the main types of share buybacks under UK law?
- Buyback out of distributable profits – the most common method, using retained profits.
- Buyback out of capital – allowed for private companies where profits are insufficient; more complex and requires special shareholder approval.
- De minimis buyback – allows a small value buyback (up to £15,000 or 5% of share capital, whichever is lower) with simplified procedures.
- Buyback of employee shares – special rules apply to shares issued under employee share schemes.
What legal steps are involved in a buyback?
The process typically includes:
- Reviewing the company’s Articles and shareholder agreements.
- Board meeting to approve the buyback.
- Shareholder approval by ordinary or special resolution.
- Drafting and signing a buyback agreement.
- Confirming funding source (profits, capital, or de minimis).
- Filing forms with Companies House (e.g. SH03, SH06 if relevant).
- Paying any applicable stamp duty.
- Updating statutory registers.
It is also common for share buybacks involving a departing director who is also an employee to be coupled with a settlement agreement. This agreement formally records the termination of employment and ensures any employment-related claims are waived, providing clarity and protection for both parties. It’s an important part of risk management, especially in contentious exits.
Do shareholders need to approve a share buyback?
Yes. Shareholders usually approve a buyback by passing:
- An ordinary resolution (simple majority), or
- A special resolution (75% majority) — if buying back out of capital.
The required approval depends on the type of buyback.
Is Companies House filing required?
Yes. After completing a buyback, the company must:
- File Form SH03 (Return of Purchase of Own Shares).
- Pay stamp duty if applicable.
- Update its register of members.
Is stamp duty payable?
Yes. Stamp duty is generally payable at 0.5% of the purchase price if the consideration exceeds £1,000.
What are the tax implications for shareholders?
The money received may be treated as:
- Capital gains (more tax-efficient in many cases); or
- Dividend income (often higher tax liability).
HMRC has clearance procedures for certain buybacks to confirm capital treatment. Tax advice should be taken in advance. We are happy to recommend some financial experts for clients with complex financial needs.
What are the risks of getting it wrong?
If a buyback is not done properly, it may be:
- Legally void.
- Expose directors to personal liability.
- Trigger adverse tax consequences.
- Attract HMRC scrutiny or penalties.
- Result in Companies House filings being rejected.
Can the company buy back shares without legal advice?
It is strongly recommended to obtain legal and tax advice. The rules are technical, and mistakes can be costly. Professional advice ensures:
- Compliance with the Companies Act 2006.
- Tax efficiency.
- Proper documentation and filings.
Who should I speak to if I’m considering a buyback?
We regularly advise directors, shareholders and companies on all aspects of share buybacks. If you require support on share buybacks or to discuss any company and commercial legal matters further, please feel free to email me or contact me on 020 8305 3539.