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How a private debt leveraged share buyback works: A simple guide

Are you a company considering borrowing money to fund a share buyback?

If you don’t have cash available but do have distributable reserves, then you can use private debt to repurchase your shares. This transaction is known as a leveraged buyback.

We asked corporate lawyer Jas Bhogal of Harper James Solicitors to explain what you need to consider when leveraging private debt to buy back shares.

Learn how private debt can support you in a leveraged buyback. And why you should talk to your accountant and tax advisor about the process.

Also, what your future shareholding means.

Let’s get started.

How Does A Typical Share Buyback Work?

Similar to dividends, one of the reasons companies instigate share buybacks is to return capital to shareholders.

To do this, they repurchase their own shares.

What Are The Advantages Of A Private Debt Fund Leveraged Share Buyback?

First off, it is common for private debt funds to provide more capital than is needed to buy back shares. The reason? Debt funds like to see you use the additional funds to fuel growth.

Beyond that, you can reduce equity dilution for ongoing shareholders.

Elsewhere, shareholders can gain tax advantages from share buybacks. Because dividends are taxed as income whereas share sales in a buyback programme are taxed as lower rate capital gains.

“Tax advice should be sought on this point,” says Jas Bhogal. “In particular, consideration should be given to any shareholders claiming the benefit of SEIS/EIS relief.”

Jas added: “Also, I recommend getting further comfort to ensure that your buyback of shares does not have an impact on any tax relief being claimed by any existing shareholders.”

How Do Tech Companies Typically Use Private Debt Leveraged Share Buybacks?

Equity release:If you have a shareholder no longer involved in your company, a share buyback allows the shareholder to cash out and exit the business.

MBO: When you put together a capital structure, a private debt leveraged buyback not only enables you to increase your shareholding, but also provides you with funds to execute your business plan, manage any issues that arise along the way and grow the business.

Redistribute shares to the management team: This strategy is typically used as a performance incentive.

Buy out a VC or a PE: And regain control of your company.

What Legal Considerations Surrounding Private Debt Leveraged Share Buybacks Do I Need To Be Aware Of?

“Legal advice should be sought if you are considering a buyback of shares,” says Jas. “It is important to ensure that you are fully compliant with the relevant statutory provisions and any contractual obligations set out in your company’s documents.”

Jas added: “Any company proposing to buy back any of its shares needs to consider some factors including the following:

  1. Articles of Association: A company’s articles of association must not obtain a restriction on the buyback of shares; otherwise, the articles of association will have to be amended to remove the restriction;
  2. Shareholder consent: The company will require its shareholders’ to approve a buyback of shares by passing an ordinary resolution – being the consent of the holders of more than 50% of its issued share capital;
  3. Price of shares to be purchased: There are no minimum or maximum price limits in respect of the price payable for the shares, but the directors of the company should be aware that they are required to comply with their common law and statutory duties;
  4. Companies must comply with the statutory provisions relating to a buyback of shares as set out in the Companies Act 2006, which includes detailed processes to be followed concerning how the buyback may be structured
  5. Tax advice should be sought to ensure that the buyback of shares does not have any tax consequences to the existing shareholders concerning any tax reliefs they are claiming.

What Your Private Debt Leveraged Share Buyback Means

“Future shareholding will be a reduction in the issued share capital meaning each shareholder has a higher % equity stake in the company,” says Jas. “Your company will, however, have a debt to repay in respect of the loan.”

So It All Adds Up To This

Whether you are seeking a share buyback to facilitate a shareholder exit, an MBO, a redistribution of shares or simply to regain control from a PE or a VC, private debt can support you in the buyback process.

To structure a private debt fund leveraged deal, talk to a venture debt broker.

And at the same time talk to an accountant and a tax advisor about the process.

Soon you’ll have it figured.

About Jas Bhogal: Jas is a corporate solicitor. She advises primarily on investment matters, working almost exclusively with high growth potential SMEs, along with venture capitalists and other investment platforms. Jas also advises on corporate governance and general day-to-day corporate/commercial matters.

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