Contact The Team


* indicates required

Share Buyback or Redemption as a Mechanism to Exit a Business

Friday, October 12, 2018

As published in The Irish Examiner, 12 October 2018.

The purchase by a company of its own shares is one of the most common methods of exiting a business without requiring a sale or liquidation of the company. There are two separate pieces of legislation that are relevant, the first being the Companies Act 2014 (“CA 2014”) which sets out the legal procedure to effect and authorise a purchase by a company of its own shares and the second is the Taxes Consolidation Act 1997 (“TCA 1997”) which sets out the limited parameters under which the monies received on the purchase or redemption can be treated as a capital receipt (taxable at 33%) rather than an income receipt (taxable at up to 52%).

Some of the most common reasons for a buyback or redemption include:
(i) To exit a shareholder or investor – the most common use for a buyback or redemption is to allow for the purchase of an exiting shareholder’s shares. The buyback mechanism allows the continuing shareholders to continue in their current shareholding proportions without a third party entering the fray without the continuing shareholders having to finance the exit;
(ii) To raise finance – redeemable shares are a common form of investment in a company as they allow a capital injection by an investor who is looking for a return of their capital within a certain timeframe;
(iii) To return cash to a shareholder – companies that hold large amounts of cash whether accruing retained profits or following the proceeds of sale from the disposal of any asset may want to divest itself of same by returning capital to the shareholders; or
(iv) To adjust shareholding proportions in a company – for a variety of reasons, certain shareholders may want to realise some of their investment, others may want to increase their investment and a buyback or redemption can facilitate either of these objectives.

Under the CA 2014 the central principles regulating the buyback and redemption of shares are unchanged but there have been very subtle changes to the procedures. It is extremely important that the correct procedures are adhered to as otherwise the acquisition of the shares will be treated as void and the company and any officer will be guilty of a Category 2 offence. It is also a key underlying requirement that any acquisition by way of a buyback or redemption be funded from distributable profits (except in very limited circumstances) which means that exiting a company using this mechanism is only available where the company has sufficient reserves.

There are certain specific rules under the tax legislation that allow any monies received on a buyback or redemption to be treated as a capital receipt subject to capital gains tax at 33%. This rate may be less where certain reliefs apply such as Entrepreneur’s Relief which is taxed at 10% up to certain limits or Retirement Relief which may potentially be taxed at 0% again subject to certain limits.

The rules under both the CA 2014 and the TCA 1997 are detailed and prescriptive and professional advice is advised in advance of any transaction to ensure that the correct procedures are followed and the correct tax treatment is applied.