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Rules simplified to stimulate employee ownership.

Companies Act 2006 has been amended to help stimulate employee ownership. With effect from 30 April 2013 new authorising and financial provisions have been  introduced that simplify the rules for share buy backs and allow companies to hold their own shares.

Statutory Instrument, S.I. 2013/999 The Companies Act (CA) 2006 (Amendment of Part 18) Regulations 2013, has amended, as from 30 April 2013, Companies Act 2006 relaxing the regulations about the authorisation and financing of share buy backs and allowing all companies limited by shares to hold their own shares in treasury. The deregulation targets the removal of barriers to the uptake of employee ownership in the private sector.

In particular in respect of the authorising of share buy backs the amended rules:

  • allow off-market share buy backs to be authorised by ordinary resolution. An off-market share buy back is one where the purchase of a company’s own shares does not take place on a recognised investment exchange, ie for shares of private companies or unlisted public companies. The previous legislation, mainly section 694 of CA 2006, required a special resolution authorising an off-market buy back. The effect of the amendment is also that of aligning the authorisation requirements of off-market purchases with those of market purchases, ie on a recognised investment exchange, which only require an ordinary resolution.
  • allow for the prior approval of multiple off-market share buy backs, for the purposes of an employee share scheme, to be authorised by a single ordinary resolution. The provisions introduced by new section 693A of the Act will not require approval of each individual contract for off-market buy backs connected with an employee share scheme. Companies will be able to authorise in advance multiple buy backs by ordinary resolution, in line with what happens with market purchases. The resolution will set the conditions under which the shares might be bought back and will have to specify the maximum number of shares that can be acquired, the price range and the time of expiry of the authorisation (that cannot exceed five years).

In respect of the financing of share buy backs the amended rules:

  • allow private limited companies to pay for their own shares by instalments where the buy back is in connection with an employee share scheme. This constitutes a relaxation of the rules in section 691 of CA 2006 that require payment for own shares to be made on purchase. Payment by instalment can be useful for companies unable to pay for bought back shares upfront.
  • allow private limited companies that want to buy back shares in connection with an employee share scheme to finance the purchase out of capital using a simplified procedure. The simplified procedure consists of the signing of a solvency statement by the directors and of shareholder approval by special resolution and therefore mirrors the regime that applies to a general reduction of capital for private companies under section 641 of the Act. The amendments have been introduced by new section 720A of the Act and reduce the more burdensome general requirements for share buy backs out of capital that involve the provision of a directors’ statement and auditor’s report; approval by special resolution; public notice of proposed payment and for the directors’ statement and auditor’s report to be available for inspection.
  • allow private limited companies to buy back shares using small amounts of cash – the lower of £15,000 or the cash equivalent of 5% of its share capital in any financial year – if authorised to do so by its articles and without having to identify the cash as from distributable reserves. The changes to section 692 of CA 2006 allow private companies to purchase a limited amount of own shares without using the other three sources of finance prescribed by the Act; ie distributable profits, proceeds of a fresh issue of shares and, for private companies, capital. This relaxation of the rules is likely to provide more flexibility to small companies that may not wish to establish an employee benefit trust (EBT) to acquire shares to be subsequently sold or assigned to employees.

In respect of treasury shares the new rules:

  • allow all companies limited by shares to hold their shares in treasury and to deal with them as treasury shares. Section 724 has been amended with the effect of permitting private limited companies and unlisted public companies to hold shares in treasury as was previously only possible to public companies with listed shares. The shares allowed to be held in treasury are those acquired out of distributable profits or, for private companies, with small amounts of cash.

Article contributed by ACCA