Companies Act 2006 – CHAPTER 4

PURCHASE OF OWN SHARES

1004. Section 162 of the 1985 Act enables a company limited by shares or limited by
guarantee and having a share capital to purchase its own shares, provided it is authorised to
do so by the articles. It is common for the members to give authority for such a purchase of
own shares through the articles, see, for example, regulation 35 of the Companies Act 1985,
Table A.

Section 690: Power of limited company to purchase own shares

1005. This section replaces section 162(1) of the 1985 Act and restates section 162(3) of
that Act.

1006. In line with the recommendations of the CLR (Completing the Structure, paragraph
2.15), section 690 removes the requirement for prior authorisation in a company’s articles for
a purchase of own shares (including any redeemable shares) by the company but makes it
clear that, if they wish, the members may restrict or prohibit a purchase of own shares by
including a provision to this effect in the company’s articles.

Section 692: Financing of purchase of own shares

1007. This section restates, the provisions of section 160(1) and (2) and 162(2) of the 1985
Act on a redemption of own shares which are applicable to a purchase of own shares, and
makes such adaptations to those provisions as are necessary to ensure that the restated
provisions work in this context.

Section 694: Authority for off-market purchase

1008. This section replaces sections 164(2) and 165(2) of the 1985 Act and restates sections
164(1), (3) and (4) and 165(1) of that Act.

1009. Under the 1985 Act a company may only enter into a contract for an off-market
purchase of shares if the shareholders approve the contract by special resolution before the
contract is entered into. An off-market purchase of shares is a purchase that is not conducted
through a recognised investment exchange (for example, the London Stock Market).

1010. Section 694 enables a company to enter into a contract for an off-market purchase of
its own shares conditional on the contract being approved by the shareholders. This will save
companies valuable time as it will be possible for the directors to negotiate and agree the
terms of a contract for an off-market purchase of shares ahead of seeking shareholder
approval. If, however, the shareholders do not subsequently pass a special resolution
approving the contract, the company may not purchase the shares in question and the contract
will lapse.

Section 702: Copy of contract or memorandum to be available for inspection

1011. This section replaces section 169(4) and (9) of the 1985 Act. Under the 1985 Act,
where a company enters into a contract for a purchase of own shares it must make available
for inspection a copy of the relevant contract or a memorandum of its terms at the company’s
registered office for a period of 10 years. Subsection (4) alters the current requirements by
providing that the contract may, alternatively, be kept available for inspection at a place
specified in regulations made under section 1136. If the company is a private company, the
contract must be available for inspection by any of its members; otherwise it must be open to
inspection by anyone. If default is made an offence is committed by the company and every
officer in default.

1012. Subsection (5) is a new provision which requires companies to give notice to the
registrar of the place where the contract is kept available for inspection. This is consequential
on the choice conferred on companies under subsection (4) as to where such documents are
kept.

Section 703: Enforcement of right to inspect copy or memorandum

1013. This section replaces section 169(7) of the 1985 Act and Schedule 24 to that Act. It
retains the existing offences for failing to keep available/allow inspection of thecontract/memorandum as required under section 702, but with the addition of a new offence
for failure to notify the registrar of the place where such documentation is kept. It also
restates section 169(8) of the 1985 Act.

Section 707: Return to registrar of purchase of own shares

1014. This section replaces section 169(1), (1A) and (1B) and restates section 169(2), (3)
and (6) of the 1985 Act and Schedule 24 to that Act. It requires a company to make a return
to the registrar within 28 days of a purchase of own shares stating, amongst other things, the
number and nominal value of the shares purchased. The return must indicate whether the
shares are of a type which could be held in treasury (see section 724), and, if so, whether the
shares were cancelled forthwith or whether they are being held in treasury.

Section 708: Notice to registrar of cancellation of shares

1015. This section replaces sections 169(1), (1A) and (1B) and restates 169(6) of the 1985
Act and Schedule 24 to that Act. It updates the notice requirements so as to require that where
shares are cancelled forthwith following a purchase (either in circumstances where the shares
are treated as automatically cancelled or where treasury shares are cancelled) the company
has to notify the registrar of such cancellation and provide the registrar with a statement of
capital (see note on section 619).

1016. As now, where a company fails to comply with the procedural requirements as to
notice, the company, and every officer of the company who is in default, commits an offence
(see subsection (4)).

CHAPTER 5: REDEMPTION OR PURCHASE BY PRIVATE COMPANY OUT OF
CAPITAL

1017. Sections 171 to 177 of the 1985 Act provide a statutory scheme for the redemption or
purchase of own shares out of capital. This scheme is available to private companies only and
the facility to redeem or purchase shares out of capital is carried forward in the following
sections.

Section 709: Power of private limited company to redeem or purchase own shares out of
capital

1018. This section replaces section 171(1) of the 1985 Act and restates section 171(2) of
that Act. It removes the current requirement for prior authorisation in the articles where a
private company makes a payment out of capital in respect of a redemption or purchase of its
own shares. If they wish, the members may, however, restrict or prohibit such a payment by
including a provision to this effect in the company’s articles.

Section 714: Directors’ statement and auditor’s report

1019. This section replaces section 173(3) to (5) of the 1985 Act.

1020. Currently, before a private company may make a payment out of capital in respect of
a purchase of own shares, the directors must have made a full enquiry into the affairs and
prospects of the company and are required, under section 173, to make a statutory declaration
confirming that: as regards the company’s situation immediately after the date on which the
payment out of capital is made, there will be no grounds on which the company could then be
found unable to pay its debts; and as regards the company’s prospects for the year
immediately following that date, the company will be able to continue to carry on business as
a going concern and be able to pay its debts as they fall due in the year immediately
following the date on which the payment out of capital is made. In forming their opinion on
the company’s solvency and prospects, the directors must take into account the same
liabilities (including contingent and prospective liabilities) as would be relevant under section
122 of the Insolvency Act 1986 (winding up by the court) to the question whether a company
is unable to pay its debts.

1021. Consistent with the approach taken in respect of reductions of capital using the new
solvency statement procedure (see sections 642 and 643 and in particular subsection (2) of
section 643), this section requires a private company limited by shares that wishes to use this
statutory scheme for a purchase or redemption of shares to take account of all contingent and
prospective liabilities, not just those that are relevant for the purposes of section 122 of the
Insolvency Act 1986 (see subsection (4)).

1022. Again, to achieve consistency with the approach taken elsewhere in the Act, the
current requirement for a statutory declaration is replaced with a requirement for a simple
statement. In contrast to a statutory declaration, the directors’ statement does not need to be
sworn before a solicitor or Commissioner of Oaths.