Financial & Legal News

Thinking of borrowing to fund a share buyback?

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Many companies make use of the provisions in the Companies Act 2006 (the “Act”) that allow a company to purchase its own shares. Typically, this procedure is used when one or more shareholders are exiting the company and the remaining shareholders do not wish to buy the shares of the leaver.

The Act regulates share buybacks to ensure that shareholders are not able to receive returns in circumstances where creditors would be prejudiced. If a private company wants to buy back its own shares it can fund the purchase in various ways. The most straightforward of these is usually to fund the purchase out of distributable reserves.

If a company has distributable reserves that cover the purchase price but does not have the cash available can it borrow to fund the purchase? Our view is that it can borrow from a person other than the selling shareholder and can give security in respect of that borrowing. The debt should not affect the distributable reserves.

The reason why the borrowing could not come from the selling shareholder is that the consideration should be paid in cash on completion of the purchase. A loan from the selling shareholder may cause this requirement not to be complied with.

The directors of the company would of course have to comply with their duties in deciding whether to take out such a loan.

The consequence of a failure properly to comply with relevant statutory provisions can be that the buyback is void. Therefore, on any share buyback, legal advice should be sought to ensure that the provisions of the Act are properly complied with.

Contact us

Should you or your company need any advice in connection with a share buyback, please contact Keith Kennedy (partner in the Corporate and Commercial Department) at keith.kennedy@pearsonlegal.co.uk or by telephoning 0161 684 6942.

Posted 1 March 2017

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

Written by Keith Kennedy

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