Companies are permitted under Companies Act 2006 to repurchase their own shares. This is sometimes referred to as a buy back. Prior to 30 April 2013, repurchased shares were required to be cancelled unless the company was a listed company. From 1 May 2013, any limited company may retain shares with a view to reselling them or for disposal through an employee share scheme. These shares are called 'Treasury shares' and are discussed below.
Shareholders may want to sell their shares back to the company for many reasons, for example:
- on retirement
- there is a disagreement between shareholders that cannot be resolved
- the death of a shareholder
For unquoted companies, a share buy back may be the only way that shareholders can get the capital they originally invested in the company back. There may be no willing external purchasers for the shares, or perhaps it is a family company and the family want to keep the shares within family ownership but cannot afford to buy the shares back from the shareholder themselves. It is important to plan well in advance by restricting dividend payments in the years leading up to a share buyback to ensure there are sufficient distributable reserves.