Redemption or purchase of a company’s own shares summary

There are two situations in which a company can acquire an interest in its own shares. Our summary explains when they arise and the procedures that need to be followed.

Exception to the rule

Generally, a company cannot acquire an interest in its own shares. This rule helps to ensure that a company’s ownership is transparent, protecting shareholders and third parties who deal with the company, such as creditors and future shareholders. The Companies Act 2006 provides an exception to this rule that allows companies to redeem or purchase their own fully-paid shares, provided the proper procedure is followed.

What is a redemption?

This is the term given to a company buying back its redeemable shares, which are issued with this situation in mind. They provide a way for a shareholder to invest in a company with a built-in exit route, so they can recover their investment without having to find a buyer for their shares and follow the usual transfer procedure. Only this type of share can be redeemed. The terms of the redemption will be set out in the share rights or articles and the process is straightforward. The company pays the shareholder for the shares and then cancels them.

What is an own-share purchase?

This is the process by which non-redeemable shares can, effectively, be redeemed. However, since the shares were not issued as redeemable, the terms of the purchase must be approved by the shareholders (just as the terms attached to redeemable shares are approved by the shareholders when they are created), so there are extra steps in the process. An own-share purchase is useful when a shareholder wants to leave a company, but a buyer for their shares cannot be found or is not allowed by the articles.

Financing

There are strict rules about how a company can finance a redemption or own-share purchase. The money can only come from distributable profits, the proceeds of a fresh issue of shares or capital (in the latter case, there are additional requirements). Professional advice should always be sought to ensure that a company can legitimately finance a redemption or own-share purchase in their specific circumstances.

Filing practicalities

The Companies House forms that must be filed to record changes to share capital can now be uploaded to the Companies House website, or companies can continue to file them in paper form. See our Companies House Filing summary for a rundown of the filing process.