On 15 February 2013, the government published a set of proposals relating to the implementation of the Nuttall Review’s recommendations on share buybacks. The changes are designed to reduce the barriers that disincentivise direct employee ownership and include easing the restrictions on the financing of buybacks and allowing off-market buybacks of shares to be authorised by ordinary resolution, relaxing the current requirement for a special resolution. The government intends to pass secondary legislation to implement the proposals which will amend the Companies Act 2006, coming into force during 2013.
As well as removing the need for a special resolution to authorise off-market buybacks, the proposals would allow multiple share buyback contracts for private companies to be authorised in advance. The proposals would also ease the restrictions on the financing of buybacks. Where a buyback is in connection with an employee share scheme, private companies would be able to pay for their shares in instalments and payments out of capital would be easier, requiring only a solvency statement and a special resolution. Any buyback could be funded by small amounts of cash (not exceeding the lower of £15,000 or 5% of share capital) which would not need to be identifiable as distributable reserves, provided the company’s articles specifically allow it. The proposals would also allow private companies and unlisted public companies to hold shares in treasury on a similar basis as permitted public companies already do.
These proposals were initiated by the Nuttall Review of Employee Ownership which made a number of recommendations to encourage employee ownership including a government consultation on the legal barriers to employee ownership, especially in relation to share buybacks. The proposed changes are not radical but do modestly cut across regulatory protections for creditors and other shareholders. However, the creditor risk is small and the increased flexibility will no doubt be welcomed by many private companies.
It is less clear whether the proposals will actually have the intended consequence of increasing employee share ownership. That will depend on a number of other factors, not least companies’ desire to give up equity to allow their employees greater participation in employee share schemes. Regulatory challenges are only one factor in the decisions companies make to offer share schemes to their employees.
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