Agreement with seller
A share buyback cannot proceed without a valid buyback contract. The contract is an agreement between the company and the shareholder(s) whose shares are being bought back, whereby the company agrees to purchase those shares.
The Buyback contract must be approved by a special resolution of the company’s shareholders.
The company may either:
- seek the approval of the shareholders to the terms of the contract before it is entered into; or
- enter into the contract before it is approved, provided that the contract provides that no shares will be purchased until its terms are so approved (i.e. the contract is conditional on shareholder approval).
Any authority given by the shareholders can be varied, renewed or revoked by a subsequent special resolution.
Form of agreement
The contract can be an unconditional agreement to purchase the relevant shares or conditional on certain events. The contract must state the names of the shareholders whose shares are being bought back and the purchase price (or details of how the price is to be calculated).
For example, the contract may:
- allow the company to buy back the shares if a shareholder ceases to be a director or employee, or
- be a way of providing a future exit strategy for an investor in the company, or
- even be used as an alternative to creating new redeemable shares.
The buyback contract does not have to be writing - although if it is an oral contract then a memorandum of its terms must be produced.