Government to make it easier for employee-owned businesses to buy back shares when employees leave

Out-Law News | 19 Feb 2013 | 11:28 am | 1 min. read

The Government will amend the Companies Act to make it easier for businesses that incentivise their employees by issuing them with shares in the company to buy those shares back when employees leave, it has announced.

The changes, which follow a short consultation, will lower the number of shareholders needed to approve 'off-market' buybacks of a company's own shares from 75% to 50%. Private limited companies will also be able to authorise multiple share buyback contracts in advance, providing that the shares it is repurchasing were issued as part of an employee share scheme.

Further changes are intended to make it easier for privately listed companies to finance share buyback exercises, and to hold repurchased shares 'in treasury' within the company itself. According to the Government's response to its consultation (21-page / 222KB PDF) on the proposals, the changes will encourage employee ownership of companies by creating a "more level playing field" between private and public limited companies. They will come into force later this year.

Share plans expert Matthew Findley of Pinsent Masons, the law firm behind Out-Law.com, said that the Government's response was a positive one. However, he warned that companies which planned to make use of share schemes to incentivise their employees still faced hurdles, due to tax issues for employees selling their shares back to the company.

"It is encouraging that the Government appears to have listened to concerns expressed about the restrictions placed on the funds which can be used to buyback shares," he said. "It is also positive that the Government seems to want to make the process easier from an administrative point of view as well."

"While these are encouraging signs, which further demonstrate the Government's commitment to employee share ownership, whether in practical terms they will make a difference remains to be seen given the tax issues arising for employees when they sell shares back to the company," he said.

Corporate law expert Martin Webster of Pinsent Masons agreed. "While there are some welcome reforms here, these are fairly cautious moves and I am sceptical that they will have a major effect on practice," he said.

The Government published its short consultation on share buybacks in October, as part of its response to an independent review of the regulatory burdens surrounding employee ownership of companies by adviser Graeme Nuttall. Employee-owned companies are those where the employees have a "significant and meaningful" stake in the company they work for, particularly by owning shares that amount to a substantial or controlling stake. Companies can be owned directly by employees through the use of employee share plans or indirectly, where shares are held collectively on behalf of the employees through a structure such as a benefit trust.