Why would a company buy back shares?

A share buyback is a simple enough concept to understand, even if the actual procedure can cause the most diligent individuals to come unstuck. It involves a company buying back its own shares from one or more shareholders at an agreed price. The company must ensure that the buyback satisfies the statutory requirements or it will be unlawful and void.

Buybacks have become more prominent over the last decade, with the Financial Conduct Authority reporting that they accounted for 42% of the capital returned by FTSE 350 issuers in 2022-2024. They also remain topical. In June 2026, HMRC consulted on possible reforms to the tax rules for distributions and repayments of capital, including purchase of own shares relief. The consultation closed on 14 September 2026. 

An invalid share buyback is the stuff of nightmares for corporate lawyers and companies alike, which begs the question: why carry one out in the first place?

Why would a company look to buy back its shares?

To return surplus cash

One of the main reasons for a company purchasing its shares is to return surplus cash to shareholders where the company has available distributable profits. A company may have surplus cash for several reasons, including as a result of outstanding profitability, the sale of a business, or having ringfenced cash for a potential acquisition that has fallen through. It is not efficient for a company to have excess cash without any planned use, and shareholders are likely to want surplus cash returned to them.

A buyback funded out of distributable profits involves a company repurchasing some of its shares for cash, with that cash going directly to the selling shareholders. If the shares are cancelled, or held in treasury, they are no longer included in the shares on which future dividends are paid. This reduces the burden on the company’s capital going forward. Unlike a regular dividend, a buyback can also give a company flexibility over the timing and scale of the return.

To give shareholders an exit route

A buyback can be used to facilitate the exit of a shareholder. This is particularly useful for a small company where share ownership is shared between a handful of investors and the remaining shareholders do not want to fund the share purchase themselves or introduce a third party. 

The percentage holdings and voting power of the remaining shareholders will normally increase if the bought-back shares are cancelled or held in treasury. However, their relative proportions will remain the same if none of them participates in the buyback. 

In relation to public companies (particularly AIM traded companies) a buyback by way of a tender offer can give shareholders an exit route where a company is intending to cancel its listing.

To support value per share

For a traded company, a buyback may support value per share, but it cannot guarantee that the market price will rise. Its effect depends on factors including the price paid, the company’s prospects and how the market assesses the use of its cash.

If repurchased shares are cancelled or held in treasury, they are excluded from the weighted average number of shares used to calculate basic earnings per share (EPS). If earnings remain unchanged, reducing that denominator will increase EPS. 

Main Market and AIM traded companies are reminded by the Investment Association’s share capital management guidelines that they should only undertake a buyback if it is in the best interests of shareholders generally and, normally, only if it would result in an increase in EPS. A statement to this effect is usually included in the relevant buyback resolution.

To facilitate employee share schemes

Employee share schemes are a popular way of incentivising staff. In a private company, a buyback may provide a route for acquiring shares from employees who leave. More generally, a company may buy shares and hold them in treasury for use when awards vest, helping it to meet awards without issuing new shares and diluting existing shareholders. 

Companies Act 2006 provisions give private companies additional flexibility for buybacks connected with employee share schemes, but the statutory conditions still need to be checked carefully.

Conclusion

Buying back shares gives a company flexibility to proactively manage its share capital. Provided that there is a sound commercial reason and the correct procedure is followed, a buyback can provide a valuable return to shareholders. Perhaps we don’t need to be so scared of them after all.