Purchase of own Shares

A purchase of own shares is when a company purchases shares in itself from an existing shareholder either:

(a) out of profits;

(b) through the issue of new shares; or

(c) out of capital.

A company buying its own shares used to be completely prohibited. Now buy-backs are permitted but because of the principle of the maintenance of share capital certain pre-conditions need met before a company can proceed:

(a) The purchase of own shares must not be restricted or prohibited by the Articles of Association. The Model Articles introduced by the Companies Act 2006 contain no such restriction;

(b) The shares being purchased by the company must be fully paid;

(c) As a result of the purchase of its own shares the company must continue to have shares in issue that are non-redeemable shares.

Financing of the purchase of own shares

A purchase of own shares is when a company purchases shares in itself from an existing shareholder either out of profits or through the issue of new shares.

Any premium payable on the purchase by a limited company of its own shares must be paid out of distributable profits of the company. If however the shares to be purchased were issued at premium, any premium payable on their purchase by the company may be paid out of the proceeds of a fresh issue of shares made for the purpose of financing the purchase.

The amount of premium which may be paid will be the lesser of either:

(i) the aggregate of the premiums received by the company on the issue of the shares purchased, or

(ii) the current amount of the company's share premium account (including any sum transferred to that account in respect of premiums on the new shares).

The amount of the company's share premium account will be reduced by a sum corresponding (or by sums in the aggregate corresponding) to the amount of any premium paid.

NOTE: Where the nominal value of shares purchased is greater than the proceeds of a fresh issue of shares made for the purpose of the redemption then the capital of the company must be maintained by a transfer from Profit & Loss reserves to the capital redemption reserve.

Articles of Association

Under the Companies Act 2006 all companies formed after 1st October 2009 will, by default, adopt standard Articles of Association unless specific Articles are drawn for that individual company. For many companies that were incorporated before this date it is perhaps advisable for companies, (both public and private), to review their articles of association with a view to bringing them into line with the 2006 Act.

NOTE: Articles of Association will need to be amended to enable the purchase of its own shares, alternatively they can be replaced with the 2006 Model Articles of Association.



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