Article / 10 Jul 2025

Getting a share buyback right

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Gateley Legal

A share buyback refers to the process of a company buying back its own issued shares from an existing shareholder. There are various reasons why a company may choose to carry out a buyback, from facilitating a shareholder’s exit to returning surplus cash to its shareholders, increasing earnings per share or enhancing share liquidity.

But there are strict legal requirements for a share buyback with plenty of traps for the unwary. Failing to comply with those requirements will result in the purported buyback being void, with drastic consequences for the company.

The requirements for a valid buyback

So, what are the key requirements?

  • The shares

The shares being bought back must be fully paid up – shares on which there is an outstanding liability (known as nil or partly paid shares) cannot be the subject of a buyback. In addition, following the buyback, the company must continue to have at least one non-redeemable share in issue.

  • The articles

Although the company’s articles of association do not need to contain an express authorising provision, they should be checked to ensure that there is no prohibition or restriction on the company purchasing its own shares. If there is, it will need to be removed by special resolution of the shareholders.

  • The agreement

The terms of the proposed buyback should be set out in a written agreement. In the absence of such an agreement, those terms must be recorded in a written memorandum.

  • The approval

The buyback agreement (or, if there isn’t one, the memorandum of terms) must be approved by the company’s shareholders. The agreement (or memorandum) must be circulated to the shareholders and the shareholder whose shares are being bought back should not vote on the approving resolution.

  • The purchase price

The purchase price for the shares must be paid from the company’s distributable profits. Alternatively, the buyback could be funded from the proceeds of a fresh issue of shares or out of capital (in which case additional requirements apply). There is also an exemption for small purchases so that, in any financial year, the company can buy back shares out of cash up to an aggregate purchase price of £15,000 (or, if less, the nominal value of 5% of the company’s issued share capital at the start of the relevant financial year).

In addition, the consideration must be paid in full, in cash, on completion of the buyback. There can be no deferral of any payment for the shares.

What happens on completion of the buyback?

Unless the company resolves to hold them in treasury, the shares will be cancelled when they are repurchased. The company’s register of members must be updated to show this.

Companies House must also be notified about the buyback and cancellation by the company filing the appropriate forms. Before it can do this, however, stamp duty must be paid to HMRC at the rate of 0.5% of the consideration.

What if it goes wrong?

As noted above, if a buyback does not comply with the strict legal requirements, it will be void.

If a failed buyback is not discovered until sometime after it purportedly took place, this can cause significant issues. The (supposedly) ex-shareholder would technically still hold their shares meaning that they were entitled to vote on any resolutions passed, and receive any dividends paid, since the date of the failed buyback. They would also be entitled to participate in any proceeds should the company be sold – invalid buybacks often come to light when the company is subject to due diligence as part of an acquisition process.

Whilst there may be steps that the company can take to rectify the position, it would be preferable to avoid the complications and uncertainty by carefully following the requirements and getting the buyback right first time.

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