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Companies and groups can restructure in many different ways and for many different reasons. Where private companies are concerned a restructuring can often occur where an existing shareholder wishes to exit the business and realise the value of his or her shareholding. This can happen for any number of reasons but frequently, retirement might be the reason or there is a divergence of views for the direction the business is taking.
Where private companies are concerned, there is usually no market for the shares and the other shareholders may not wish to nor have the financial means to purchase a departing shareholders’ shares. In these circumstances the solution for all parties can often be found by means of the Company buying-back its own shares from the departing shareholder. When a private company buys back its own shares there are strict Company Law requirements which must be met before the Company could enter into a transaction of this type. In the first instance, the Company must have the power under its Articles of Association to purchase its own shares.
In addition, where a trading company buys its own shares back, this can have advantageous tax treatment for the exiting shareholder. A company purchase of its own shares will either be taxed as an income distribution at rates of up to 38.1% (ie, a dividend) or, if a number of strict conditions can be met and subject to obtaining advance tax clearances from HM Revenue and Customs, taxed as a capital gain subject to rates as low as 10%.
It can often be the case that a departing shareholder and the Company wish to enter into an agreement for the shares to be bought back, but the Company does not have sufficient cash to satisfy the price to be paid for the shares, or laying out a substantial amount of cash might seriously impact on the working capital of the business. There should still be a solution to this problem either by way of a multiple completion share buy-back or by entering into a phased buy-back of tranches of shares over a period of time.
Springfords have structured and advised on numerous Company purchase of own shares transactions and if you wish to discuss how this might provide a solution for your shareholders and Company, please contact Kevin Meaney at firstname.lastname@example.org. It goes without saying that no client should contemplate entering into such a transaction without taking professional tax advice and legal advice.