Share buybacks have been in the news again after politician Vince Cable referred to them as ‘a scandalous trick’ used by listed companies to artificially inflate directors’ pay. A share buyback is where a company buys back its own shares from shareholders.

Certainly we have seen a surge in popularity for buybacks in recent years. A Goldman Sachs report revealed UK companies spent £15bn buying back their own shares in the 12 months to 31 January 2018.

There are many reasons why a company might want to do this. Often it is a way of returning surplus cash to shareholders. There is however growing concern that some companies may be using buybacks to increase their earnings per share (EPS) in order to deliver enhanced executive remuneration packages.

The problem being that any increase in EPS is largely artificial as it is driven by the reduced number of shares in issue rather than any underlying increase in profitability.

This concern led to the Government announcing earlier this year that it is commissioning a report into buybacks and whether companies are using them to artificially inflate executive pay. The report is due to be published later this year.

For those companies planning to make share buybacks (whether through market purchases or off-market), there are a number of legal and regulatory factors to consider.

The procedure for carrying out a share buyback is set out in Part 18 of the Companies Act 2006. Failure to comply with these provisions will result in the purchase being void and an offence being committed by the company and any officer in default.

Companies require shareholder approval before
they can carry out a buyback. Listed companies will typically seek shareholder approval at their AGMs to carry out a buyback of up to 10% of their issued share capital.

Listed companies must also comply with the relevant provisions of the Listing Rules, the EU Market Abuse Regulation (MAR) and the Disclosure and Transparency Rules relating to share buybacks.

In addition, companies seeking shareholder approval for buybacks should pay heed to investor guidelines including the ‘Share Capital Management Guidelines’ published by the Investment Association.

These guidelines make clear that dividends remain the preferred method for returning surplus funds to shareholders and if a company does want to purchase its own shares, it should only do so if it is in the best interests of shareholders and results in an increase in EPS.

It will be interesting to see whether, following publication of the Government’s report into share buybacks later this year, further regulatory restrictions are imposed on companies wishing to purchase their own shares.

Jessica Adam, partner at Macfarlanes

‹ Previous2018-07-26Next ›