In the corporate world, a company buying back its own shares—known as a share buyback—can be a strategic tool used for a variety of commercial, financial, and shareholder management reasons. In England and Wales, the practice is governed by a tightly regulated legal framework under the Companies Act 2006, which sets out how a company may lawfully repurchase its shares, the sources of funding that can be used, and the procedural steps that must be followed.
This guide explores the key reasons for share buybacks, outlines the statutory framework, highlights common pitfalls, and offers insight into best practices for businesses navigating this process.
Why Would a Company Buy Back Its Own Shares?
Companies may consider buying back their own shares for a number of strategic and financial reasons:
1. Return Surplus Cash to Shareholders
When a company is generating strong profits and has excess cash, it may prefer to return funds to shareholders through a buyback instead of paying dividends. In many cases, this can be more tax-efficient for the recipient shareholder.
🔍 Example: A family-owned business with three shareholders wishes to return value to one shareholder who wants to exit. A share buyback funded from distributable profits achieves this while keeping control with the remaining shareholders.
2. Facilitate a Shareholder Exit
For private companies in particular, there may not be an active market to sell shares. A buyback offers a structured method for departing shareholders to realise the value of their shares without selling to external parties.
3. Strengthen Ownership Control
Where a company wishes to consolidate ownership—for instance, reducing the stake of passive shareholders—it may repurchase shares to concentrate voting rights among active stakeholders or founder-owners.
4. Improve Financial Metrics
In public companies, reducing the number of shares in issue boosts key metrics such as earnings per share (EPS), often resulting in a more favourable share price.
5. Prevent Dilution or Manage Employee Share Schemes
Companies may repurchase shares to manage dilution resulting from share options or to re-use shares within approved employee share schemes (e.g. EMI options).
Legal Authority for a Share Buyback
A company can only repurchase its own shares if it has the legal authority to do so.
1. Articles of Association
The articles must not prohibit share buybacks. If silent, buybacks are usually permitted. However, it is good practice to include an express provision to that effect.
2. Shareholder Approval
The Companies Act 2006, Part 18, requires a buyback to be approved by shareholders:
- For a market purchase, an ordinary resolution (majority approval) is required.
- For an off-market purchase, a written contract setting out the terms must be approved by shareholders before it is entered into. The approval must be by ordinary resolution, and the shareholder whose shares are being purchased is not permitted to vote on the resolution.
Types of Buyback
There are three key types of buyback permitted under English company law:
Market Purchase
This applies to listed companies and involves buying shares on a recognised stock exchange, under s.693 of the Companies Act 2006. A general authority by ordinary resolution is required, usually renewed annually.
Off-Market Purchase
The most common form of buyback for private companies. This involves purchasing shares directly from one or more shareholders through a contract. Specific procedural requirements apply (see below).
Buyback in Connection with an Employee Share Scheme
Permitted under s.691(3), this route allows companies to repurchase shares from employees or former employees without the full shareholder approval process, provided the shares were originally issued under a qualifying employee share scheme.
Funding a Share Buyback
The way a company funds a share buyback is critically important and heavily regulated.
1. Out of Distributable Profits
This is the most common and straightforward method. A company must have sufficient accumulated realised profits, less realised losses, to cover the purchase price.
📌 Legal Reference: Section 710 of the Companies Act 2006.
2. Out of the Proceeds of a Fresh Issue
A company can issue new shares and use the proceeds to fund the buyback, provided those shares were issued specifically for this purpose.
3. Out of Capital (Private Companies Only)
Permitted under Chapter 5 of Part 18 of the Companies Act 2006. The company must:
- Pass a special resolution (75% majority).
- Produce a directors’ solvency statement, stating the company can meet its debts for 12 months following the payment.
- Publish a public notice in the Gazette.
- Allow a five-week objection period for creditors.
This route is more complex and should be considered carefully, with appropriate legal and financial advice.
Contractual and Procedural Steps in a Buyback
Board Resolution
The directors must pass a resolution approving the buyback in principle, confirming that the company has the legal power and funding to proceed.
Share Buyback Agreement
An agreement must be drafted setting out:
- The number of shares to be purchased
- The purchase price
- Payment terms
- Completion mechanics
- Warranties and indemnities
For off-market purchases, this agreement must be approved in advance by ordinary resolution of the shareholders.
Completion
On completion:
- The company pays the purchase price
- The shares are either cancelled or (if a public company) held in treasury
Filing Obligations
The company must complete the following statutory filings within 28 days of the buyback:
- Form SH03: Return of purchase of own shares
- Form SH06: Notice of cancellation of shares (if applicable)
- Updated Register of Members: Showing change in ownership
- Register of Share Buybacks: A statutory register that must be maintained
Failure to file can result in penalties and invalidation of the buyback.
Tax Considerations
The tax treatment of the buyback depends on several factors:
Capital vs Income Treatment (For Individuals)
HMRC may treat the proceeds as capital (subject to Capital Gains Tax) if:
- The purchase benefits the company’s trade
- The seller is reducing their total shareholding
- The seller is not connected with the company after the buyback
✅ If capital treatment is achieved, the seller may qualify for Business Asset Disposal Relief, reducing CGT to 10%.
Otherwise, proceeds may be taxed as income at dividend rates (up to 39.35%).
Corporation Tax (For Companies)
If a corporate shareholder sells shares to the company, the receipt is generally subject to corporation tax on chargeable gains.
Common Pitfalls
- Not obtaining shareholder approval: Particularly for off-market purchases, the resolution must be passed in advance and correctly exclude the selling shareholder from voting.
- Funding from the wrong source: Using capital without following the correct Chapter 5 procedure can render the buyback unlawful.
- Missing filings: Late or incorrect filing of SH03 or SH06 can attract penalties and invalidate the process.
- Unlawful financial assistance: If the company effectively borrows to finance a buyback, care must be taken to avoid prohibited financial assistance rules.
Best Practice Tips
- Conduct a full review of the company’s articles before planning a buyback.
- Keep comprehensive board minutes and resolutions.
- Clearly document the commercial rationale behind the transaction.
- Obtain tax clearance from HMRC in advance where capital treatment is sought (using form CTA1).
- Engage professional advisors to draft and review all legal documentation and ensure compliance with the Companies Act 2006.
Our Opinion
A share buyback is a powerful corporate tool that can serve a range of strategic purposes—whether to enable shareholder exits, streamline capital structure, or return value to owners. However, it must be approached with care because the legal formalities are not optional and the penalties for getting it wrong are significant.
Whether your company is undertaking a one-off buyback to assist with succession planning, or you’re a public company managing shareholder returns, it is essential to follow the procedures laid down in Part 18 of the Companies Act 2006. Legal and tax advice at the outset will ensure the process runs smoothly, is compliant, and achieves the intended commercial outcomes.