Childcare Counsel : Buying back shares

Are you in a position where a shareholder in your nursery wishes to sell their shares?

The market for buying nurseries may be proving difficult to find a buyer to purchase the shares of the potential outgoing shareholder or you simply may not want to introduce a new buyer to the purchase the shares in the nursery.  If so, have you considered the route of a share buyback by you the nursery company? The Companies Act 2006 (the “Act”) permits companies to buy back their own shares from their shareholders provided that:

• they are not prohibited from doing so by their articles of association;
• they have sufficient distributable reserves to fund the buyback; and
• the procedural requirements set out in Part 18 of the Act have been complied with.

In order to ensure compliance with Part 18 of the Act, you must follow the below steps:

• the buyback needs to be approved by its shareholders;
• the shares being repurchased must be paid in full;
• at the time of purchase, the consideration for the shares must be in cash;
• the repurchase must be financed from proceeds made following the issuing of fresh shares, out of distributable reserves or in the case of private companies limited by shares, out of the capital of the nursery company; and
• finally, the shares must be cancelled following the buyback or alternatively held in treasury if financed out of distributable reserves.

If you can satisfy each of the above, you may want to consider a share buyback in respect of your nursery. 

It should be noted that any failure to comply with these conditions will render the acquisition void and officers in default could be liable to a prison term of up to two years or an unlimited fine.

Reasons why companies decide to purchase their own shares include:

• to return surplus cash from the sale of a business or outstanding profitability for example, to its shareholders;
• increase the company’s gearing, which is the ratio of debt to equity, as the amount of equity may be reduced following a buyback;
• improve the company’s earnings per share as well as increase their net assets per share, that is, the net assets attributable to each equity share;
• certain employees are issued shares through employee incentive schemes, when such employees cease to be employed, a buyback can be used by the company to repurchase the shares issued to them; and
• finally, a company’s articles may provide that if a shareholder wishes to leave the company but the remaining shareholders have no desire to purchase their shares, a buyback can facilitate an exit route for the departing shareholders whereby the Company steps in and purchases the shares itself.

This way, any continuing shareholder avoids having to pay an outgoing shareholder personally and it avoids a third party gaining an interest in the Company.

• Contact Fiona Phillips on 017922 77833 or email: fphillips@morganlaroche.com