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Law for Business

Knowhow - guidance - precedents

26 MAR 2013

Employee ownership and share buy backs

By Jennifer Martin - Associate, Field Fisher Waterhouse LLP (email: jennifer.martin@ffw.com)

Field Fisher Waterhouse

The momentum continues as the Government takes another positive step to encourage and facilitate the growth of employee ownership following publication of the Nuttall Review last summer.   The latest of these steps considered how the rules around share buy backs can be amended to facilitate direct share ownership by employees - Jennifer Martin explains:

The Nuttall Review

The Nuttall Review of Employee Ownership (the "Nuttall Review") was commissioned by the Deputy Prime Minister in response to emerging evidence that employee ownership is, for a variety of reasons, an under-used business model.  This is despite there being a substantial body of evidence demonstrating the benefits of employee ownership.

Field Fisher Waterhouse LLP partner, Graeme Nuttall was tasked by the Deputy Prime Minister to identify the barriers to employee ownership and make recommendations as to how these barriers can be knocked down.  The Nuttall Review was published on 4 July 2012 and, in all, made 28 recommendations which range from increasing awareness, establishing an employee ownership Institute and making trust, tax and company law  changes.    The  Department for  Business,  Innovation and  Skills  ("BIS")  published  its response to the Nuttall Review on 30 October 2012 - all 28 recommendations were accepted in whole or in part.

Almost immediately BIS initiated a consultation on a specific recommendation to deregulate how companies authorise and finance share buy backs and hold shares in treasury. Recommendation V of the Nuttall Review proposed as follows:

 "The Department for Business, Innovation and Skills should consult upon the operation of internal share markets to support companies using direct share ownership, including holding private company shares in treasury and facilitating shares buy backs".

The Government's  response to the consultation confirmed a package of six specific measures to facilitate the share buy back process.

Authorisation of share buy backs

Measure 1:   Off-market share buy backs currently require a special resolution. This will change so that an ordinary resolution of the shareholders will suffice.

Measure 2:   A single ordinary resolution may be used to authorise multiple share buy backs for the purposes of or pursuant to an employees' share scheme (subject to certain financial and time limits).

Financing a share buy back

Measure 3:   A private company can agree with a selling shareholder to pay in instalments for shares that are being bought back for the purposes of or pursuant to an employees' share scheme - payment by instalments is currently prohibited.

Measure 4:  A private company is permitted to buy back shares each financial year up to a limit of either £15,000 or the cash equivalent of 5% of its share capital (whichever is lower) without having to identify whether this is funded from capital or distributable profits.

Measure 5:    A private company buying back shares out of capital for the purposes of or pursuant to an employees' share scheme may do so using a special resolution and directors' solvency statement only.

Disposal of repurchased shares

Measure 6:   Shares of all limited companies can be held as treasury shares following a buy back and subsequently be reissued to new shareholders.

Measures 1, 4 and 6 are not restricted to buy backs in connection with an employees' share scheme and so will be welcomed by private companies generally (and also, in relation to treasury shares, public companies whose shares are not currently "qualifying shares").

It is expected that these changes will come into force in April 2013 although at the time of writing the Government is yet to publish an updated statutory instrument to implement them.

Impact on employee ownership

The Nuttall Review identified one of the main barriers to the adoption of employee ownership is the actual (or perceived) complexity associated with it.   In particular, in relation to direct share ownership by employees, the requirement for a special resolution to approve a buy back contract and the financing restrictions, including the prohibition on a company buying back shares by instalments can make the process difficult or even unworkable. Difficulties arise especially when employees leave the business.

Typically, a private company avoids these share buy back problems by establishing an employee benefit trust ("EBT"). The trustees of the EBT buy shares from departing employees. An EBT enables shares to be bought on any payment terms, without shareholders' approval and "warehoused" pending their re-use under an employees' share scheme. The Nuttall Review reforms seek to establish share buy backs as an easier and less costly alternative to using an EBT.

The deregulation of the shareholders' approvals process and the way in which share buy backs are financed, including the ability to pay for shares in instalments, should all encourage a fresh look at using buy-backs, instead of an EBT, to facilitate an internal share market for a private company's employees' share scheme.

Field Fisher Waterhouse LLP is a leader in the field of employee ownership with a long history of helping to develop the employee ownership business model in all its forms.

For further information please contact Jennifer (Jennifer.martin@ffw.com), Graeme graeme.nuttall@ffw.com) or visit the employee ownership section of our  Tax Blog

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