Government announces changes to share buy backs for employees

Government announces changes to share buy backs for employees

On the 15 February 2013, the Government published its response to the consultation on Employee Ownership and Share Buy Backs following the Nuttall Review.

In July 2012, Graeme Nuttall published a review into employee ownership of companies as evidence suggests that companies with employee owners are more resilient in downturns and tough economic times; a particularly important consideration given the last few years. One of the recommendations from the Nuttall Review was for the Government to consult on changes to the way companies could buy back shares to improve the internal share market for such companies.

The Government has now published the results of this consultation which has broadly supported the adoption of the original proposals as well as some further changes not originally envisaged. The Government intends to bring in these new measures during 2013 by amending the Companies Act 2006.

The proposals that have been agreed are:

  • to lower the shareholder approval threshold from a special resolution (75% approval) to an ordinary resolution (over 50% approval) for off market buy backs;
  • allowing private limited companies to use instalments to pay for shares being bought back;
  • allowing private limited companies to then hold these shares as treasury shares;
  • enabling companies to approve multiple off-market buy backs in advance, through one resolution, where such buy backs are related to an employee share scheme;
  • reducing the requirements for a private limited company to finance a buy back out of capital (the new regime will require a solvency statement and special resolution);
  • allowing private limited companies to finance buy backs from small amounts of cash (not exceeding the lower of £15,000 or 5% of share capital in any financial year) even if they are not specified as distributable reserves; and
  • allowing all companies limited by shares (including private and unlisted companies) to hold their own share in treasury.

To put these proposals in a bit of context, these are largely aimed at private companies whereby employees directly own shares (rather than through an employee trust). In these companies, when an employee leaves, the company will often buy the shares back from the employee in order to redistribute them to the remaining or new employees. The procedures for this were considered to be overly burdensome considering the restrictions on companies buying their own shares.

Nick Lindsay
nick.lindsay@gmail.com
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