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Does the payment for a share buy-back have to be in cash?

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It is often thought that the purchase price for a share buy back has to be satisfied in cash; however, it could be structured in such a way that the company sells an asset to the outgoing shareholder for cash which can then be set-off against the company’s obligation to  pay the share buy-back price from a company’s distributable reserves or capital.  Stacey Browne, Company Commercial Solicitor, explains more about the requirement of a share buy-back being bought back in cash and the options available for a company.

What is a share buy-back?

A share buy-back is when a company purchases its own shares from a shareholder. There is a legal requirement for the shares being bought to be paid for at the time of transfer in cash; but there is no definition of what ‘paid for’ means which can raise questions. There could be a way in which to reduce the amount to pay from the company’s distributable reserves, using set-off.

Set-off is a right for someone who owes money, to subtract the amount they owe from a debt that they are owed by someone else; therefore reducing their debt. For example, if a company agrees to buy the shareholder’s shares back for £100,000 and also agrees to sell to the shareholder a property and a car for a total of £75,000. The £75,000 can then be set off against the price of the shares leaving a balance of £25,000 to be paid by the company in cash.

Established practice is that all payments for a buy back of shares must be made in full, in cash, at the time of transfer; however the courts have upheld that a set off of one debt against another constitutes payment of both debts, even in the event of a company buy-back of shares. Therefore, a share buy-back could be structured in a way that there are two cash sales, the prices of which are set off against each other, as long as the transactions are genuine. Although a company would need the full amount available in their distributable reserves, this structure would effectively reduce the cash outlay, thus benefiting the company’s cash flow.

There are other ways in which a buy-back could be structured and other options in which to finance a buy-back, other than the above example, therefore it is essential that you discuss your plans with professional advisers first. Please note, there are also different tax consequences associated with different structures too therefore it is important to discuss your plans with an accountant to ensure the best structure is formulated to suit you and your business needs.

To have your questions answered regarding share buy-back options, shareholder agreements or company structures, you can contact Stacey on 023 8071 7411 or email staceybrowne@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.