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Jordans FAQs: Which is a more effective procedure: the section 642 capital reduction or a company share purchase?

21st Aug 2013
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One of the factors that we have to be useful in answering this question is: how much is the value that will be returned to the member holding the shares in question?

As a general rule, if the value to be returned to the member is less than either their nominal value or the amounts paid up on them, it makes more sense for the reduction procedure to be used.  This way, the specific value can be returned, the remnant (if any) can be extinguished and the shares cancelled. 

By contrast, if this were to be done under the share purchase procedure, as has been suggested on occasions, while the ultimate effect would have been the same, in most cases the transactions would have been liable for stamp duty.

If the value returned to the member will be the shares’ market value (and higher than their nominal value) the share purchase procedure should be used, not least because the nature of a reduction of capital is that only the capital paid up on the shares can be returned.

About the author : Adam Wadsley is  Corporate Legal Services Executive,  Jordans Limited

For more information please visit: www.jordans.co.uk

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