Is Your Share Buyback Valid?
This question tends to surface at the worst possible moments: during due diligence, mid-transaction while negotiating indemnities, or when someone tries to rely on shares sitting in treasury (shares that are held by the company that have no rights).
Increasingly, the answer we are seeing in practice is no.
We are seeing a growing number of technically invalid share buybacks under UK company law. Share buybacks arise in a range of scenarios, including employee equity clean-ups, investor exits, group reorganisations, and companies seeking to hold shares in treasury.
A common thread in many of the issues we encounter is a well-intentioned but flawed assumption: that leaver or transfer provisions in a company’s articles or shareholders’ agreement are “self-executing”, and that signing a stock transfer form (STF) is enough to complete the process. It isn’t. In practice, leaver-driven buybacks are just one subset of the problem, but they are often where mistakes arise most frequently.
This article is a practical reminder of what is required for a legally valid share buyback, where companies commonly go wrong, and why obtaining legal advice early can help avoid costly issues later.
The Legal basics
Under the Companies Act 2006, a company can only purchase its own shares if it follows a specific statutory process. In broad terms, there are four key requirements:
- A Written Contract
The buyback must be documented in a written contract, or the terms must otherwise be set out in writing. This is not optional, even where transfer mechanics appear elsewhere, such as in the articles of association.
- Shareholder Approval
The buyback contract must be approved by shareholders before it is entered into. This is typically done by ordinary resolution, although companies should check their articles for any additional requirements.
- Sufficient Distributable Reserves
The company must have sufficient distributable profits available to fund the buyback, unless one of the more complex capital payment procedures is used (which most private companies tend to avoid).
- Payment on Completion
For an off-market buyback, the consideration must be paid in full at the time of completion. Deferred consideration is not permitted.
Miss one of these steps, and the buyback is likely to be void.
Where Things Commonly go Wrong
“It’s in the Articles, so it happens automatically”
Leaver provisions often state that, following a “bad leaver” event, shares must be transferred or bought back. In practice, this can sometimes become a “trigger the clause, sign an STF, job done” exercise.
While the articles may, in some circumstances, help satisfy the requirement for the buyback terms to be in writing, a contractual obligation to transfer shares is not the same as completing a valid statutory buyback. If the company itself is acquiring the shares, the Companies Act process must still be followed in full.
Over-reliance on Stock Transfer Forms
An STF is a mechanism for transferring legal title. It is not a substitute for:
- a buyback contract,
- shareholder approval, or
- compliance with the statutory funding requirements
Relying on an STF alone to implement a buyback is a common and significant error.
No (or Late) Shareholder Approval
Even where a buyback agreement exists, companies sometimes fail to obtain shareholder approval before entering into it. Retrospective approval will not remedy the issue.
Funding Assumptions
Companies may assume they have sufficient distributable reserves or fail to check altogether. If the accounts do not support the availability of sufficient distributable profits at the relevant time, the buyback may be invalid.
Payment Issues
Consideration is sometimes left unpaid, deferred, or informally set off against other amounts. For an off-market buyback, payment must be made in full on completion.
How can we help?
We are encountering invalid share buybacks with increasing frequency, particularly during deal-related work and due diligence exercises.
If you are considering a share buyback or are unsure whether an earlier buyback was implemented correctly, our corporate and commercial team can help. Please reach out to Mahitha Kumar. We can assist with structuring the transaction, preparing the required documentation, and ensuring the statutory process is properly followed to reduce the risk of issues arising later.
