A purchase or buyback of shares by a company is a procedure which is commonly used by companies registered in England, Wales or Scotland, particularly in the following scenarios:

• As a means of returning surplus cash to shareholders.
  
  A purchase of own shares or share buyback may be used as an alternative to a dividend payment. It may be more beneficial than a dividend payment because in some situations the tax treatment of the cash in the hands of the shareholder may be treated as a capital receipt rather than as income. If this tax benefit is sought, tax advice should always be sought from a professional advisor.
  
  
• To provide an exit route for a shareholder.
  
  If there is no willing buyer for the shares, perhaps because there is no market for the shares, or the existing shareholders don't want to sell to a third party, a purchase of own shares may be used to buy out one or more shareholders.
  
  
• Following the death of a shareholder.
  
  If the executors wish to raise capital to pay death duties or the beneficiary has no interest in the company, a purchase of own shares can be used to realise the value of the investment without the need to find a suitable buyer or for the other shareholders to find payment for the shares.

The purchase of own share procedure is set out in the Companies Act 1985. The purchase can be implemented out of distributable reserves, the proceeds of a fresh issue of shares or out of capital.

Failure to follow the correct procedures can result in the buyback being void and therefore unenforceable, and the Companies Act 1985 also imposes criminal penalties on both the company and its officers.

As this is a relatively complex procedure with a number of traps for the inexperienced, professional advice should always be sought when implementing this procedure.

Find out more about the purchase of own share procedure.

We can provide full documentation and assistance with a purchase of own shares from distributable profits or out of capital. In each case we have two levels of service:

Documents Service
For clients who can confidently take care of the stamping and filing requirements, our Documents Service includes:

• Obtaining all relevant company information from the public file.

• Ensuring that the company's articles of association contain appropriate power to purchase its own shares.

• Preparing the share purchase agreement and all necessary minutes and resolutions to approve the agreement including a procedural guide.

• Preparing all necessary statutory forms.

Documents plus Filings Service
For clients who would like assistance with the stamping and filing requirements, our Documents plus Filings Service includes all of the above plus:

• Arranging for the stamping of Form G169 by HM Revenue and Customs.

• Checking and filing all relevant documents with Companies House

• Where the purchase is to be made out of capital we will also arrange for all required notices to be published in the London Gazette.

If the company’s articles of association do not include the power to purchase own shares, memorandum and articles updating services are available for an additional fee.

Next steps
Our fee for a purchase of own shares out of distributable profits starts from £275 + VAT (£323.12) (excluding stamp duty). Download our information sheet and order form for a purchase of own shares from distributable profits.

Our fee for a purchase of own shares out of capital starts from £525 + VAT (£616.87) (excluding stamp duty and advertising disbursements). Download our information sheet and order form for a purchase of own shares out of capital.

For more information on our purchase of own shares service please contact our Corporate Legal Services team.