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Employment Law

Legal guidance - compliance - software

05 NOV 2012

Employee Share Ownership: Proposals For The De-Regulation Of Share Buybacks By Companies With Employee Shareholders

The Nuttall Review commissioned by the Department for Business Innovation and Skills and published on 4 July 2012 identified key barriers to the uptake of employee ownership and made a number of recommendations on how to reduce these barriers.

The barriers identified as disincentivising the uptake of direct employee ownership included the Companies Act provisions regulating the share buy back process.

On 18 October 2012, DoBIS published a Consultation Paper seeking views on how the government should implement employer owner status and a specific consultation document upon de-regulating share buy backs.

The problem

Where employee ownership is achieved by direct employee share ownership, rather than by an employee trust model, in order to avoid loss of ownership by the existing workforce, employee-owned companies need a mechanism by which to buy back shares owned by employees who are leaving or who have left the company in order to re-distribute them to new starters.

Buy back arrangements depend on the selling shareholder agreeing a price with the buying company either on departure or pursuant to a buyback agreement entered into at the commencement of employment as a condition of the employee being awarded shares by the company.

Although a number of former restrictions on a company purchasing its own shares -in particular those in s.151 CA 1995 – were repealed in Part 18 CA 2006, buy back still requires compliance with a number of provisions which regulate the process.

Companies may only buy back shares off-market if they have a buy back contract authorised by a special resolution of the shareholders in General Meeting (i.e. with 75% agreement, excluding the votes of the seller) (ss.693-695 Companies Act 2006). This provides protection to existing shareholders by preventing company directors from entering into share buy backs that are not in the company’s or other shareholders’ interests.

Whilst the finance for the purchase may come from either distributable profits or from the proceeds of issuing new shares, if a private company wishes to finance the buy back out of capital, the requirements include a declaration of solvency, auditors’ report, special resolution of shareholders and advertisement to creditors.

In addition, there are a number of other regulatory safeguards such as the director’s statutory duties and the ability of shareholders by special resolution to alter the company’s Articles to prevent buy backs.

The Nuttall Review concluded that these provisions were overly burdensome, and recommended that Government simplified them. The Government has accepted this recommendation and hence, the consultation.

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