June 4th, 2018

How companies can pay back their shareholders

Successful companies will all find themselves in a position where they are generating more cash than they wish to reinvest in the business.

When a company has significant reserves of cash that it would like to return to shareholders or decides to use a return of value to shareholders before the company is sold, there are various options worth considering to find the most efficient for the company’s particular circumstances.

Below we consider the key mechanisms employed to return value to shareholders as well as advantages and disadvantages of each. For each method the starting point is a review of the existing articles of association and shareholders agreement and renewal if necessary. Please contact our company secretarial department for more information.

Cash dividend

This is the most straightforward method of returning capital to shareholders. Subject to any limitations and prohibitions set out in the company’s articles of association, cash dividends may be paid as final and/or interim dividend. Where the company’s articles are silent about the amount of dividend and the payment mechanism, the declaration and payment of dividend are governed by the Companies Act 2006 and common law. Before a company can lawfully pay any type of dividend, it must have sufficient distributable profits.

Non-cash (assets) dividend

Dividends can also be satisfied by the transfer of non-cash assets. This kind of dividend, known as dividend in specie or dividend in kind, operates in such a way that dividend of a specified amount is declared but the payment of dividend is satisfied by transferring a non-cash asset of equivalent value to its shareholders. An example could be shares held in another company, property, or machinery. To declare a non-cash dividend an express authority to do so must be set out in the company’s articles and a company must have positive distributable reserves. Where a company identifies a non-cash asset that it wishes to transfer to a shareholder or sister company at below market value (for example, as part of an intra-group reorganisation), the transfer is known as a distribution in specie but there is no requirement to declare a dividend.

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Share buyback

A share buyback gives the company the flexibility to make the purchases of shares as and when their share price is best to do so and also allows shareholders the choice as to whether or not they wish to participate. For UK shareholders subject to UK tax, the proceeds of sale are treated as capital for tax purposes.

Usually listed companies arrange for an annual authority to enable them to purchase up to 10% of their share capital and, if a company plans to commence a buyback programme it will give notice of that intention.

There are some limitations of the share buyback procedure, however:

  • buyback shares must be fully paid;
  • premium-listed companies are only able to buy back up to 15% of their shares and they will typically only have authority from shareholders for 10%;
  • stamp duty of 0.5% will be payable on the shares that the company repurchases;
  • private companies can fund buybacks out of capital but public companies cannot;
  • both private and public companies can finance the buyback out of distributable profits or a new share issue;
  • unless the buyback is done by a written resolution procedure (available only to private companies), a company must allow at least 15 days for the share buyback process.

B share scheme (a bonus issue)

Under a B share scheme, a new class of shares is created which can be redeemed (that does not involve stamp duty) or repurchased (capital treatment to the extent that they represent a repayment of share capital), or dividend paid on them and then converted into worthless deferred shares (income treatment).

Reduction of capital supported by solvency statement

This mechanism is not available to public companies and therefore they must use the court approved procedure for reducing share capital.

A company may reduce a nominal value of shares, or an amount paid up on issued shares, or a share premium account, capital redemption reserve or redenomination reserve. Where a company reduces a number of shares, those are being cancelled. An amount cancelled can be repaid directly to shareholders. The key advantage of this mechanism is no stamp duty liability and there is no need to have distributable reserves which normally are required for a share buyback.

Redemption

This procedure is available only if shares are issued as redeemable. There is no mechanism to convert already issued shares to redeemable shares. Redeemable shares can be redeemed at the option of the issuing company or the holder. The advantage of a redemption over a share buyback is that the company will not have to pay stamp duty.


Other areas Stanley Davis Group can assist with:

  • designing ways for a shareholder to exit the company under the provisions of a shareholders’ agreement and/ or the company’s articles;
  • designing bespoke articles of association with preferential share rights for investors and specific investor provisions such as matters requiring investor’s consent, capital maintenance and directors duties in a shareholders’ agreement;
  • share sales, acquisitions of companies, share purchase agreements with cash and non-cash consideration provisions including, share-for-share exchanges or issue of loan notes, buying out shareholders;
  • intra-group reorganisations, including transfer of subsidiaries within a group, intra-group loans, dividends and share issues;
  • designing articles with employee shareholder provisions, including bad and good leaver provisions and growth shares;
  • preparing documents for raising finance by way of loan notes or convertible loan notes;
  • designing and preparing the necessary documents for capital contributions to create positive reserves required for distributions and transfer of assets below the market value;
  • alteration of share capital by re-designating and consolidating shares, converting shares into different classes of shares, creating new classes of shares (e.g. redeemable and/ or preference shares), redenominating shares;
  • re-registering public companies as private limited and unlimited companies and private companies as public;
  • board support.

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