Deal or No Deal: When Share Buybacks Go Wrong

In the context of M&A, a defective share buyback is like opening a mysterious red box— what you find inside could sink your deal before the buyer even has the chance to say, “No Deal!”

A share buyback occurs when a company purchases its own shares directly from shareholders. This can be a shrewd and strategic option, particularly when a shareholder is seeking to exit and the company has the funds to buy their shares. Such a move keeps ownership within the company, avoids bringing in external investors, and preserves shareholder balance. However, there’s a catch: buybacks are tightly regulated under the Companies Act 2006 and getting it wrong can prove costly.

For a buyback to be valid, several conditions must be satisfied. The shares must be fully paid, and the company must fund the buyback using distributable profits, permissible capital or proceeds from issuing new shares. Crucially, payment for the shares must be made in full at the time of purchase, meaning deferred payments or anti-embarrassment provisions are not permitted. In addition, the buyback agreement must be in writing and receive approval from the remaining shareholders. 

While the process may seem straightforward in theory, in practice we frequently encounter companies that have attempted buybacks in the past without seeking the right professional advice and have consequently fallen into one (or more) traps. The most common of these include:

• failing to pay the full amount at the time of the purchase;
• neglecting to secure proper shareholder approval;
• omitting a written buyback agreement; 
• having insufficient distributable reserves or an improper funding source; 
• failing to make necessary Stamp Duty payments to HMRC;
• not updating the statutory registers correctly or keeping proper records; and/or
• failure to make all necessary filings at Companies House. 

These issues often surface during buyer due diligence—precisely when a sale is on the table. When this happens, buyers’ lawyers are unlikely to overlook any discrepancies.

The main concern for a buyer is that if a buyback is defective, it is rendered void. In such cases, the shares are treated as if they were never bought back and remain under the ownership of the original selling shareholder. This creates several issues. Questions arise as to the true nature of the payments made for the shares, entitlement to dividends paid since the attempted buyback and most importantly the legal ownership of the shares– a situation that no buyer wants. These complications can be complex and severe, often resulting in significant additional costs and delays and in the worst cases, derailing transactions entirely. 

Beyond the impact on transactions, defective buybacks can also create problems for a company internally. This may necessitate complex unwinding and re-execution exercises, expose the company and its directors to liabilities and result in reputational damage. 

While companies may be tempted to avoid legal fees for what appears to be a simple transaction, it is important to recognise that a poorly executed share buyback can unravel years later. Investing in proper legal and financial advice now can protect your future sale prospects—and your company’s value.