How companies can return value to their shareholders
Where a company has accumulated significant distributable reserves, it may desire to return some of this value to its shareholders. This may be to reduce a cash surplus or to return value to the shareholders before a company sale. There are various methods available to make such a distribution and, below, we consider the key mechanisms that can be employed as well as considering the advantages and disadvantages of each method. For more detailed information, please contact us and ask to speak to our Company Secretarial department.
This is the most straightforward method of returning value to shareholders. Subject to any limitations and prohibitions set out in the company’s articles of association, cash dividends may be paid as final and/or interim dividend. Where the company’s articles are silent about the amount of dividend and the payment mechanism, the declaration and payment of dividend are governed by the Companies Act 2006 and common law. Before a company can lawfully pay any type of dividend, it must have sufficient distributable profits.
Non-cash Dividend (Distribution in Specie)
Dividends can also be satisfied by the transfer of non-cash assets. This kind of dividend known as dividend in specie, or dividend in kind, operates in such a way that a dividend of a specified amount is declared but the payment of the dividend is satisfied by the transfer of a non-cash asset of equivalent value to its shareholders. An example could be shares held in another company, property, or machinery. To declare a non-cash dividend, the company’s articles must contain an express authority to do so, and the company must have positive distributable reserves. Where a company identifies a non-cash asset that it wishes to transfer to a shareholder or sister company at below market value (for example, as part of an intra-group reorganisation), the transfer is known as a distribution in specie but there is no requirement to declare a dividend.
Share Buyback (Purchase of Own Shares)
A share buyback is useful for when a shareholder is seeking an exit and it provides the flexibility of allowing the share price to be agreed between the company and the departing member. For UK shareholders subject to UK tax, the proceeds of sale are treated as capital for tax purposes.
Usually listed companies arrange for an annual authority to enable them to purchase up to 10% of their share capital and, if a company plans to commence a buyback programme, it will give notice of that intention.
There are some limitations of the share buyback procedure, however:
- the shares to be repurchased must be fully paid;
- premium-listed companies are only able to buy back up to 15% of their shares and they will typically only have authority from shareholders for 10%;
- stamp duty of 0.5% will be payable on the shares that the company repurchases;
- private companies can fund buybacks out of capital, but public companies cannot;
- both private and public companies can finance the buyback out of distributable profits or a new share issue;
- unless the buyback is done by written resolution (only available to private companies), a company must allow at least 15 days for the share buyback process.
B Share Scheme (a Bonus Issue)
Under a B share scheme, a new class of shares is created that can then be redeemed or repurchased, allowing the distribution to be treated as capital instead of income. The shareholders would usually be given the option of whether to participate in the allotment of the bonus B shares but could choose a cash alternative if they would prefer the distribution to be treated as income rather than capital.
Reduction of Capital Supported by Solvency Statement
This mechanism is not available to public companies and therefore they must use the court approved procedure for reducing share capital.
A company may:
- reduce the nominal value of shares;
- reduce a share premium account (or any other capital reserve); or
- cancel shares entirely
An amount reduced/cancelled can be repaid directly to shareholders or transferred to the Profit & Loss account. The key advantage of this mechanism is that there is no stamp duty liability and there is no need to have distributable reserves, which are normally required for a share buyback.
This procedure is available only if shares are issued as redeemable. There is no mechanism to convert already issued shares to redeemable shares. Redeemable shares can be redeemed at the option of the issuing company or the holder. The advantage of a redemption over a share buyback is that the company will not have to pay stamp duty.
Other areas Formations Direct can assist in:
- designing ways for a shareholder to exit the company under the provisions of a shareholders’ agreement and/ or the company’s articles;
- designing bespoke articles of association with preferential share rights for investors and specific investor provisions such as matters requiring investor’s consent, capital maintenance and directors duties in a shareholders’ agreement;
- share sales, acquisitions of companies, share purchase agreements with cash and non-cash consideration provisions including, share-for-share exchanges and buying out shareholders;
- intra-group reorganisations, including transfer of subsidiaries within a group, intra-group loans, dividends and share issues;
- designing articles with employee shareholder provisions, including bad and good leaver provisions and growth shares;
- alteration of share capital by subdividing or consolidating shares, converting shares into different classes, creating additional new classes of shares (e.g. redeemable and/ or preference shares) or redenominating shares into different currencies;
- re-registering public companies as private limited and unlimited companies and private companies as public;
- board support.