Share Buybacks: Tackling Challenges and Managing Dissent

Share buybacks can be a powerful tool, offering flexibility in capital management, increasing shareholder value, and facilitating strategic exits. However, they are not without their challenges, particularly when shareholders do not see eye-to-eye on the proposed buyback. Dissenting shareholders can stall or even derail the process, creating hurdles for companies to implement their plans. In this blog, we’ll dive into the essentials of share buybacks, explore common issues that arise when shareholders object, and uncover creative workarounds to navigate conflicts while staying compliant and maintaining trust.

Let’s break it down: what is a share buyback and why is it such a powerful tool?

Essentially, a share buyback is where a company purchases its own shares from shareholders - a strategic move with wide ranging benefits. Here’s why buybacks can be a game-changer:

• Redistribution of surplus cash – excess funds from the sale of the business, key assets or other windfalls can be returned to shareholders;
• Facilitate shareholder exits – particularly useful for small companies with limited liquidity, buybacks offer an exit route for shareholders and departing employee shareholders.

What are the requirements for a share buyback?

Share buybacks must meet a number of key conditions to be compliant with the Companies Act 2006:

• Purchase method – shares should be purchased either on-market (an option for public companies with shares traded on e.g. the Main Market or AIM) or off-market (typically for private limited companies or unlisted and unquoted public companies) depending on the company’s strategic and legal requirements;
• Shareholder approval – buybacks must be approved by the company’s shareholders before the buyback completes;
• Fully paid up – only fully paid shares are eligible for purchase;
• Cash payment – buybacks must be settled in cash, in full, at the time of the purchase;
• Funding sources – financing for the buyback can only come from distributable profits, the proceeds of a fresh issue of shares, or in the case of a private limited company only, from capital;
• Post-buyback action – repurchased shares must be cancelled, or if financed out of distributable profits, held in treasury.

Learn more about share buyback requirements and common pitfalls on our “Understanding and Avoiding Illegal Share Buybacks” podcast.

Why shareholders may pushback on buybacks: key concerns

When it comes to share buybacks, not all shareholders may be on board – some may raise concerns that can complicate or even block the process. Set out below are common reasons behind shareholder objections.

• Perceived misallocation of resources – shareholders may believe that the company’s funds could be better utilised for growth initiatives e.g. expanding operations, developing new products/service lines or making strategic acquisitions.
• Reduction in the company’s value – share buybacks use a company’s available funds to complete the purchase, potentially devaluing the company and therefore the remaining shares.
• Reduction in dividends – because it is necessary for a company to use is distributable reserves to undertake a share buyback, this may result in remaining shareholders receiving lower (or no) dividends than they may otherwise have received during the specific period in question.  
• Unfavourable price – shareholders may feel the buyback price undervalues their shares or that they might be able to obtain a higher price by selling to a third party. Similarly, shareholders may believe in the long-term value of the shares and want to hold on to them for the continued dividends and/or capital growth in the future.
• Lack of transparency in valuation – shareholders may have concerns with how a company has valued their shares if the valuation mechanism has not been shared with them, particularly if the company’s articles of association are not followed or do not contain provisions on pricing mechanics. There may also be concerns that other shareholders are being offered more favourable terms and that they are not being treated equally.
• Tax concerns – for UK-resident selling shareholders, the default position is that the consideration (less the subscription price) is treated as a distribution (taxable as income) unless specific conditions for capital treatment are met, which may be more favourable than the proceeds being taxed as a dividend (at the time of writing, the top rate of tax if a capital event is 24%, the top rate of tax for dividends is 39.35%).
• Signal of weak growth opportunities – shareholders may interpret a buyback as a sign that the company lacks better investment opportunities potentially signalling stagnation or lack of vision.
• Conflict of long-term goals – investors focus on long-term growth and may see buybacks as short-term exercises that detract from sustainable value creation.
• Change of shareholder proportions – share buybacks will result in fewer shares being in issue and this could change each shareholders’ proportion of the total shares, and their corresponding voting power and right to receive dividends. This may, for example, lead to certain shareholders gaining greater control of the company compared to other minority shareholders – this can cause serious disputes (particularly in small companies) if the resulting shareholder proportions are no longer in keeping with prior agreements and understandings as to who would control or benefit from the company.

Lack of trust in the Company’s directors – some shareholders might not agree with the directors of the company and might have reservations over the rationale for instigating a buyback.

Overcoming objections: effective remedies for dissenting shareholders in a buyback

• Negotiation of buyback price/terms – a shareholder might be holding out for a better price per share from the company and so negotiation can be key in completing the deal. If the parties are still unable to agree a price and/or terms of a buyback, an option might be to appoint an independent expert to value the shares.
• Unfair prejudice petition – a shareholder cannot be forced to sell their shares if they do not want to. However, they can be prejudiced as a result of a buyback, for example, if some shareholders are offered better terms than others. It may then be open to the injured shareholder to petition for unfair prejudice – the typical remedy for a successful unfair prejudice claim is for the Court to order that the company or other shareholders buy out the petitioner at a fair price.
• Derivative action – shareholders may bring a derivative action in the name of the company against its directors if they pursue a buyback in breach of duty (e.g. in a scenario where a buyback is not in the best interests of the company), which causes the company loss. The claimants may seek an injunction restraining the buyback from proceeding, or that the errant directors compensate the company for loss caused to the company.
• Minority shareholder protections – if the company’s articles of association, or a shareholders’ agreement has been entered into, which provide specific protections for shareholders in the course of buybacks (e.g. specific valuation methodology or a requirement for terms to be the same for all shareholders in a particular transaction), these may be invoked to ensure that minority interests are not overridden. 

Exploring the alternatives: what to do when share buybacks aren’t the right choice

Where share buybacks aren’t a viable option, companies have a range of alternative strategies to explore, tailored to the original goals behind the buyback.

Navigating share buybacks with confidence

While share buybacks remain a valuable strategy for enhancing shareholder value and optimizing capital structure, the challenges posed by dissenting shareholders cannot be overlooked. By understanding the reasons behind objections and implementing thoughtful remedies, companies can better navigate these hurdles and ensure a smoother process. Clear communication, fair pricing, and legal safeguards are essential in managing dissent and maintaining trust among shareholders. Ultimately, with the right approach, companies can leverage share buybacks or suitable alternatives to achieve their financial goals while fostering a collaborative environment for all stakeholders.

Further information

If you have any questions regarding this blog, please contact Mei Chung in our Corporate, Commercial and Finance team or Filton Pavier in our Dispute Resolution team.

About the authors

Mei is an Associate in the Corporate, Commercial and Finance team and joined Kingsley Napley in August 2021 from a regional firm. She advises entrepreneurs, investors and established businesses across a variety of sectors on a broad range of corporate and commercial matters.

Filton is an Associate in the Dispute Resolution team at Kingsley Napley, having completed his training contract at the firm. His experience spans a range of complex matters, including civil fraud claims, contractual, company, boardroom and shareholder disputes, and professional negligence claims.