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A share buyback or redeem of shares is often the most logical step for companies faced with having a shareholder who would like to relinquish their shareholding but may not want to sell their shares on the open market. Examples of where this might happen include:
In theory, share buyback or share redemption may seem like a straightforward option, but, as with most legal and taxation matters, this is far from the case. There are many factors to consider, starting with the basic decision of whether a buy-back or redemption of shares is the most suitable course of action or in fact possible under company law or tax law.
Company law is a fundamental consideration in these scenarios. A company must have distributable reserves to be a position to acquire the shares if it doesn’t, a Summary Approval Procedure (SAP) may be suitable to create the reserves or possibly depending on the circumstances it could be financed from the fresh issue of shares. The shares can be bought back by they way of an off-market purchase contract or by converting the shares to redeemable shares. For a redemption to be effected, the company must also have shares that are redeemable. Various resolutions must be passed and minutes recorded for the transaction to comply with company law.
The value of the shares is another critical element. The shares must be redeemed at market value, and this often poses a problem both from a taxation and shareholder perspective. Various tax heads that are potentially in scope when a company buys back or redeems shares include capital gains tax, stamp duty (buy-back) and, potentially, income tax, depending on how the transaction is structured.
