Contractors' Questions: How to buy shares in my 'Ltd'?

Contractor's Question: I run a limited company that has been trading for more than a decade. My friend has held a 25% stake in the company since it began but would now like to sell it. Having agreed a price for the shares, I was planning to purchase them myself over a period of time. However, my friend has suggested that the company invests in itself and buys the shares. The logic being that the value of the company will stay the same, but this does not make sense to me or feel right. How would this actually work?



Expert's Answer: Your friend's understanding of what happens when a company buys its own shares is not correct. When a limited company purchases its own shares, instead of the company having an investment in the shares it intends to buy, the shares bought back are treated as cancelled. So if your company had 100 shares in issue and the bought 25% shareholding, there would only be 75 shares in issue afterwards and you would own all of the company. The distributable reserves of the company would be reduced by the cash outlay for the 25% holding, so your shares would have the same value as before the transaction.



The company's articles of association need to be checked to make sure there is nothing to prohibit the buy-back of its own shares and, if you wish to proceed, you would follow a straightforward procedure, including the preparation of a purchase agreement and the passing of a special resolution of the company approving such an agreement.



In terms of financing the purchase, should the company not have sufficient distributable reserves to pay the price agreed, and assuming it is a private company, the shares could be bought back out of capital. However, that involves a more complicated procedure. There would also be stamp duty to pay on the purchase price of the shares at 0.5%, provided the consideration is above £1,000.





The expert was Chris Lane, partner at chartered accountants Kingston Smith LLP.