As young companies grow and circumstances change, we are frequently asked to advise on ways in which members of the original founder team can agree to reduce their shareholding, perhaps as a result of a reducing role for the company.
In these scenarios there is rarely the necessary distributable profit in the company which would allow it to “buy back” such shares in accordance with the legislation. Similarly, the other members of the founder team may not have the resources to acquire shares from the reducing shareholder at a fair value. There can also be tax implications arising from transfers of shares amongst employees.
I am therefore very interested to see the introduction of new legislation at the end of April which allows private companies to buy back shares using small amounts of cash (not exceeding the lower of £15,000 or 5% of share capital in any financial year) that does not have to be identified as distributable reserves (i.e. profits).
There is a technical question in relation to what counts as “share capital” which MBM are currently seeking Government clarification on and any companies wishing to avail themselves of the new provision would need authority to do so in their Articles of Association, but on the face of it, this new legislation appears to be an ideal solution for the problem that we frequently encounter.
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