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Company wants to buyback shares from EIS investors

Company wants to buyback shares from EIS investors, but reserves are low...

Client company obtained investment from outside investors under EIS/SEIS, totalling £200K.  Over 3 years later and the client has asked whether the company can borrow funds (loan) to buy back the shares from the investors.  I have advised that this won't work, as a buyback has to be from distributable reserves.

Client cannot afford the purchase personally.

Shares have paid dividends over the past 3 years, albeit fairly low amounts.

I don't think this can be done?  Am I missing something?  Can an associated company buy the shares?

Company makes a small profit.

Thanks

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11th Feb 2019 10:48

Ignoring the reserves issue a purchase of own shares will not get capital treatment until the shares have been owned for at least 5 years.

For both reasons the best option is likely to be to put a holding company in place buying out the EIS/SEIS investors in the process.

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to gbuckell
11th Feb 2019 13:59

What about a capital reduction instead?

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to Wilson Philips
11th Feb 2019 14:19

Presumably the EIS investors will now want to be paid market value for the shares, rather than simply the amount that they originally subscribed (assuming that market value is higher). The excess will still be taxed as a distribution, unless capital treatment applies.

One imagines that the reserves issue would not arise, unless it was intended to purchase the shares for more than the amount originally subscribed.

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to Vile Nortin Naipaan
11th Feb 2019 16:18

I agree on point one - I was assuming that, like many EIS companies that I have seen, the value of the shares hasn't actually moved much. But of course if the value has increased then the excess would be taxed as an income distribution.

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11th Feb 2019 13:55

Have the investors agreed to sell the shares?

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to bernard michael
11th Feb 2019 19:09

All but one of the shareholders have agreed. Client and company doesn't have the funds available, so the client has asked whether a company bank loan will allow the company to purchase the shares back.

I understand this cannot be done, as there are insufficient distributable reserves.

After speaking to the client, it seems the best the shareholders can hope for is what they initially paid for the shares. Apparently they are happy with this.

It is the CA2006 requirement that states 'the company must have sufficient distributable reserves to cover the purchase price of the shares' and 'must be paid for in cash on completion.'

It says "purchase price", so even if they only get paid back what they initially bought the shares for, I don't think this can be done as a buyback of own shares.

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