The Companies Act 2006 (Amendment of Part 18) Regulations 2013 (the “Regulations”) came into force on 30 April 2013. They are designed to make it easier for companies to buy back shares from employees and perhaps encourage employees to participate in share schemes.
The Regulations aim to remedy concerns raised in the Nuttall Report (published in July 2012) that the existing buyback regime discouraged employee share ownership. The report suggested that employees are sometimes reluctant to accept shares or share options in private limited companies, as it is difficult for them to find a buyer for the shares and realise any value for the shares.
The Regulations seek to improve the operation of internal share markets as well as to reduce the cost and inconvenience of compliance with buyback procedures. Despite a possible need for private companies to amend their articles in order to take advantage of the new regime, the changes are welcome and could offer substantial benefits.
Share buybacks are most conspicuously undertaken by public companies in order to manipulate the perceptions and value of shares, but also to return surplus cash to shareholders. Traditionally, private companies have found it difficult to take full advantage of this mechanism, even where undertaken as part of an employee incentive scheme. Administering employee share schemes has proved particularly inconvenient owing to restrictions on private companies holding their own shares, often a result where a departing employee has been divested of their holdings. Such schemes are often avoided altogether or have required private companies to follow inconvenient practices of cancelling shares, obtaining frequent shareholder approvals or administering an employee benefits trust.
The Regulations’ principal amendments are:
- Private companies are permitted to obtain a general authority to buy back shares which are part of an employee shareholder scheme;
- Shareholder approval for buybacks will also now only require a bare majority (50.1%) as opposed to a special majority (75%), unless the buyback is financed out of the company’s share capital (where a special resolution and statement of solvency will still be required);
- Private companies may, if they provide for it in their articles of association, now finance the buyback of shares (subject to certain modest limits) without having to show that they have distributable reserves;
- The procedure for financing employee share scheme buybacks out of capital has also been simplified, with an auditor’s report no longer required;
- Where companies buy back shares held in an employee share scheme, payment may be deferred, leaving companies to implement payment policies which reflect their cash flow position.
IWG COMMENT:
The government hopes these changes will help cultivate more harmonious and productive labour relations, as well as promoting a greater concentration of larger companies. The Regulations will certainly make the operation of employee share schemes more straightforward and are genuine evidence that the government is committed to reducing red tape. The much-heralded ‘John Lewis model’ that it is hoped that these changes will encourage has attracted gushing praise in recent years. However, the government’s policy could well be viewed as contradictory – reducing the rights which employees are entitled to (e.g consultancy rights, unfair dismissal protection) whilst at the same time attempting to cultivate a stakeholder model conveys a confused policy.
Employment remains at a high in the UK, partly owing to the flexible labour market, so legislative changes such as this may only have fringe effects on the overall economy. Whether entrepreneurs or family-owned businesses will take advantage of the new regime remains to be seen, but it is commendable that the government wishes to offer greater incentives to build employee-centred businesses, aside from it being inconsistent with other policies.
PLEASE NOTE: this briefing note contains information about current legal issues and is only intended as a general statement of the law – it does not give legal advice. No action should be taken in reliance on this note without specific legal advice.
For further information please contact:
Ben Manners
Partner, Corporate
Telephone: +44 20 7845 7453
Email: benmanners@iwg.co.uk