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14th October, 2021 by Miles Barnes
Share buybacks are a popular and effective way for companies to maintain control of their share capital, buy out troublesome shareholders, or return some capital to existing ones. However, the process of completing a share buyback is not as simple as many assume.
Unlike most transactions, share buybacks must be completed in accordance with a strict statutory procedure otherwise the entire transaction will be defective and the buyback rendered void. This means that:
Unfortunately, most business owners do not discover that their share buyback is defective until they are trying to sell their business 10-15 years later and it comes up during a due diligence exercise. By this time, the departed shareholder may be dead, cannot be found, unwilling to re-sell their shares or insists on being paid a much higher price. The company may also have to re-purchase the shares again, execute a new share buyback contract and pay more to the former shareholder. All of which can significantly impact the sale of a business. The process of unwinding and rectifying a defective share buyback is also costly and time-consuming.
Over the past year, our Corporate team has come across several defective share buybacks, during either the sale of a business or a routine audit. These cases had their own specific issues, but the common denominator in each one was a failure by the company or the people advising them to properly execute the share buybacks in accordance with the legal requirements. Fortunately we were able to fix the issues in most of the cases we’ve dealt with, but this isn’t always possible and it’s not unheard of for buyers to pull out of an acquisition because of issues with share buybacks.
If you are looking to buyback any shares in your company or are concerned that any buybacks you’ve done in the past may not have been done properly, do give us a call and we can help to save you any headaches further down the line.
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