Buy Back: Into The Future for Company Repurchases of Own Shares
With a view to easing the introduction of the new Employee Shareholder contract, the Government has now (on 15th February 2013) published its response to the recent consultation about Employee Ownership and Share Buy Backs. RM2 were one of 43 firms who responded to the consultation.
The Government’s response, which is largely endorsed and welcomed, confirms that changes will be implemented later this year (2013) amending the corporate law requirements relating to company repurchases of own shares.
Evidence shows that employee owned businesses are more resilient in tough economic times and provide benefits to employers and employees. The Government is committed to promoting and facilitating and increasing the number of companies adopting employee ownership (in various different forms and to differing levels of participation) as a business model.
We have previously examined the various implications of the proposed new Employee Shareholder contract from an overview perspective, employment law perspective and share valuation perspective. Our overview identified that one of the practical challenges to be overcome would be how to deal with the repurchase of shares from departing employees.
The Government recognised that there was a need to consult and improve the operation of internal share markets to support companies using direct share ownership. At present buy-backs from employees need to be facilitated by an Employee Benefit Trust (‘EBT’) or a company repurchase of own shares.
We have previously explored the current regime applying to company repurchases of own shares here. There is a very prescriptive process to be followed under Company Law and the need for repurchased shares to be cancelled often distorts sensitive shareholder interests. Our earlier article also highlighted the tax treatment that applies and the difficulty in obtaining capital gains treatment as opposed to income tax treatment.
It must be recognised, therefore, that whilst the proposed company law changes are to be welcomed in seeking to streamline the company law aspects and the proposed treasury share position embraced as a means of facilitating a simpler recycling of equity interests, the proposals set out below do not in any way seek to amend the tax treatment in relation to a company repurchase of own shares, which remains as before (see here).
The proposals for the future
The Government’s has confirmed that amendments will be made to the Companies Act 2006 by way of secondary legislation (SI 2013/999) to implement the proposals outlined below. These measures will come into force in April 2013. In relation to authorising share buy backs, these amendments will:
- Allow off-market share buy backs to be authorised by ordinary resolution; and
- Allow for the prior approval of multiple off-market share buy backs for the purposes of or pursuant to an employee share scheme to be authorised by a single ordinary resolution.
In relation to financing share buy backs, these amendments will:
- Allow private limited companies to pay for their own shares in instalments (where the buy back is for the purpose of or pursuant to an employees’ share scheme)
- Allow for private limited companies to finance buy backs (where the buy back is for the purpose of or pursuant to an employee share scheme) out of capital subject to the signing of a solvency statement by the board of directors and shareholder approval by special resolution; and
- Allow private limited companies to buy back shares using small amounts of cash (an amount not exceeding the lower of £15,000.00 or the cash equivalent of 5% of share capital in any financial year) that does not have to be identified as distributable reserves.
In relation to treasury shares, these amendments will:
- Allow for all companies limited by shares to hold their own shares in treasury and to deal with such shares as treasury shares.
Whilst it may appear that having the ability to hold shares in treasury eradicates the need for an Employee Benefit Trust, in practice this may not be the case. As noted earlier above, that tax treatment relating to repurchasing shares will remain the same, and therefore a large number of the benefits of implementing an EBT still remain attractive, in particular the ability to divest shares within the capital gains tax regime which might provide for a tax charge as low as 10% compared with the default income tax treatment where company repurchases of own shares are treated as deemed distributions.
There has been consideration of this matter in relation to the new Employee Shareholder status and para. 16 of Schedule 22 as the Finance Bill prevents an income tax charge arising when employee shareholder is no longer an employee or officer of the company (or an associated company). This ensures that payment received from the company by leavers gives rise to a gain (which may be exempt). Shares sold by employees who remain employees however do not fall within this provision.
HMRC have stated that they will publish guidance on the tax aspects of Employee Shareholder status in advance of the 1st September commencement date.
We have been advised that the Government currently has no plans to amend the share repurchase distribution rules in respect of non-Employee Shareholder status shares.
HMRC has drafted updated guidance on the tax issues arising from SI 2013/999, but this is subject to consultation and not yet published.
For more information on the potential benefits available from using an EBT in conjunction with employee share plans and for succession planning purposes, please see download our fact sheet here, or contact Liz Hunter or Fiona Bell directly on 020 8949 5522.