1. Distributable profits
Procedurally, the most straightforward way for a company to fund a share buyback is out of distributable profits (i.e. paying for the shares using the company's distributable profits).
2. Fresh share issue
If a company does not have sufficient (or any) distributable profits then one option is to issue new shares (a fresh issue of shares) to fund the buyback.
This is a little more complex than performing a buyback out of distributable profits as it requires:
- a new issue of shares; and
- there are restrictions on the payment of any premium (i.e. any sum in excess of the nominal value of the shares purchased) to the exiting shareholder(s) out of the proceeds of the new issue.
A private limited company can fund a buyback of its shares out of capital (a public limited company cannot), but only after first exhausting:
- any 'Available Profits'; and/or
- the proceeds of any fresh issue of shares made for the purpose of buying back the shares.
There are quite complex procedural requirements that must be followed in order to successfully perform a buyback out of capital.