Staying Up To Date

James Towler

Some business-related issues crop up with increasing frequency. Our Head of Corporate and Commercial, Partner James Towler, highlights two of those he has recently encountered.

Share Buybacks

We are frequently asked to document the buyback of shares by company clients, often when a shareholder is leaving the company and the continuing shareholders want the company to buy the leaver’s shares, rather than find the money from their own resources.

Shares can be purchased by the company either out of reserves or capital. The former is the preferred route, as it is simpler and so costs less in professional fees.

Unless the buyback is done by the book, it will be invalid, with unforeseen and expensive consequences for the continuing shareholders.

The first point to note is that, unless the company has enough distributable reserves on its balance sheet to fund the purchase, it will not be able to use this procedure.

The second is that the shares must be paid for in cash at completion. If the company fails to observe this requirement, the buyback will be invalid and the selling shareholder will still be regarded as being the owner of the shares. This an easy one to get wrong. Unless correctly advised, continuing shareholders may believe that they can pay for the shares by instalments.

This is awkward for the continuing shareholders if they are selling the company to a third party several months or years later, since the buyer will not complete unless the sellers can show they have title to 100 per cent of the shares, which will be impossible if the share buyback has not been done by the book.

Unfortunately, the continuing shareholders are unable to ratify the invalid buyback whether as director or shareholders, but will have to redo the buyback.

They could find themselves having to go back to the retiring shareholder and redo the share buyback from scratch, which is likely to mean paying a premium for the retiring shareholder’s shares. This assumes that the retiring shareholder is still alive. If not, they would probably have to negotiate new terms with the retiring shareholder’s children, who may be more hard-nosed over the price of the shares.

Virtual Meetings for Private Companies

Private companies formed after 2006 which adopted the model articles are entitled to hold virtual meetings of the members.

This has been particularly useful during the pandemic if companies have had to hold general meetings during lockdown.

Some companies have articles which require meetings of shareholders to be held in person. These might include charitable organisations and clubs. Temporary regulations introduced to allow all companies to hold virtual general meetings during lockdowns, even if not permitted by their articles, expired at the end of April 2021. These temporary regulations were particularly aimed at public companies to allow them to hold an annual general meeting for their shareholders, but they were also helpful for private charitable organisations and clubs with the same requirement.

We advise all private companies with articles of association which do not currently permit electronic meetings of members to consider amending their articles to allow them to do so, to enable them to continue to function if the Government introduces restrictions on face-to-face meetings in the future. Those amendments should include provisions to address the quorum for a meeting and what happens if the technology being used to connect members fails during the meeting.