STSM075010 - Companies and shareholders: company’s purchase of own shares: legal restrictions

Common law and company law impose restrictions on companies buying back their own shares (Companies Act 2006/Part 18). A company may:

• Redeem its own redeemable shares, or
• Contract with shareholders to make an ‘off-market’ purchase of its shares, if approved by special resolution at a general meeting of the shareholders, or
• (Listed companies only) make a ‘market purchase’ of its shares through the exchange, subject to ordinary resolution at a general meeting of the shareholders, provided in each case that the company’s Articles of Association permit it to do so.

All the above options are subject to additional restrictions in order to maintain the company’s capital, to protect creditors and shareholders. Company funds may not be used to fund the redemption or purchase of the company’s own shares except in approved ways:

• Companies are permitted to fund redemptions or purchases of their own shares from distributable profits (payable as dividends) or from the proceeds of issuing new shares, as these funding methods do not affect the company’s capital.
• A reduction of capital may be sanctioned by Court scheme under the provisions of the Companies Act (CA06/S641).
• Private companies may fund redemptions or off-market purchases by a ‘permissible capital payment’ if it complies with certain statutory procedures and is approved by special resolution of the shareholders (CA06/S710-712).