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Amendments made to Parts 17 and 18 of the Companies Act 2006

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10 Mar 2015

The government has amended Part 17 and Part 18 of the Companies Act 2006 (the Act). Part 17 has been amended to restrict capital reductions in connection with takeovers and Part 18 has been amended to clarify requirements relating to share repurchases.

Part 17

The Companies Act 2006 (Amendment of Part 17) Regulations 2015 (SI 2015/472) (link to the statutory instrument) were made on 3 March 2015 and came into force on the following day.  They prohibit a company from reducing its share capital as part of a scheme of arrangement where the purpose of the scheme is to acquire all the shares of the company.  There is an exception when the acquisition amounts to a restructuring that inserts a new holding company into the group structure.

There is a transitional provision to ensure that the prohibition does not affect takeovers where an announcement concerning a firm intention to make an offer has been made before the Regulations came into force, or in the case of a company that is not subject to the City Code on Takeovers and Mergers, the terms of the offer have been agreed.

The amendment inserts new sub-sections into section 641 of the Act which is concerned with the circumstances in which a company may reduce its share capital. The purpose of the amendment is to close what the Government regarded as a stamp duty loophole.  A takeover can be affected either through a contractual transfer of shares or through a scheme of arrangement under Part 26 of the Act.  Such a scheme may be structured as either a “transfer scheme” or a “cancellation scheme”.  An advantage of using a cancellation scheme was that stamp duty was not payable because shares were cancelled and then reissued to the new owner rather than transferred. Following the amendment, this is no longer possible.

Part 18

The Companies Act 2006 (Amendment of Part 18) Regulations 2015 (SI 2015/532) (link to the statutory instrument) were made on 2 March 2015 and come into force on 6 April 2015. They amend Part 18 to clarify the operation of certain provisions of the Act which were amended in 2013 by the Companies Act (Amendment of Part 18) Regulations 2013 (SI 2013/999).

Section 692 of the Act was amended in 2013 to permit private companies to repurchase their own shares for cash otherwise than out of distributable reserves, up to a value of the lower of £15,000 and 5 per cent of the share capital of the company each financial year.  This was part of a Government initiative to promote employee share ownership.  The 2013 amendments contained a drafting error which led to uncertainty about whether the complex rules applicable to purchases of own shares out of capital applied in this case, although it clearly was the Government’s intention that they should not.  The 2015 amendments clarify that the option to repurchase a private company’s own shares for cash within the de minimis limits is not subject to the general requirements for a purchase of own shares out of capital.  They also clarify that the limit of 5 per cent of share capital is by reference to the nominal value of the company’s fully paid share capital as at the beginning of the financial year.

The 2015 amendments also bring repurchases under the new section 692(1ZA) de minimis provision within the scope of section 734 which addresses the accounting consequences of a repurchase out of capital.  For example, if the cash paid is less than the nominal amount of the shares repurchased, the difference must be transferred to capital redemption reserve.  If the cash paid is greater than the nominal value of the shares repurchased, section 734 specifies which reserves may be reduced by the difference.  The amendments also prevent shares repurchased under section 692(1ZA) from being held as treasury shares.

The Department for Business, Innovation and Skills (BIS) has revised its guidance on share buy-backs.  The guidance Employee Ownership and Share Buy Backs: Simple guide to the Companies Act 2006 (Amendment of Part 18) Regulations 2013 & 2015 is available on the BIS website.

Some other clarifying amendments have also been made in connection with the timing of repurchases of own shares in connection with employee share schemes and to avoid possible duplication of the requirement to deliver a statement of capital to Companies House.

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