Employee share buy-back rules relaxed

Simplified rules for businesses to buy back employee-owned shares in the company have come into force. The changes aim to encourage greater take-up of direct employee ownership and reduce the regulatory burden on businesses.

The changes to the Companies Act 2006 came into force on 30 April and implement certain recommendations from the 2012 Nuttall review, which found that the law governing the buy-back of shares from employees who leave was 'overly burdensome'.

The new rules allow:

  • shareholders to approve off-market share buy-backs by a simple majority, instead of by the previous three quarters approval rule
  • for a greater range of financing options for share buy-backs
  • companies to hold bought-back shares 'in treasury' so that they can be easily reissued to new employees or scheme joiners
  • advance approval of employee share buy-backs by shareholders, rather than on a case-by-case basis

A 2010 study by the Cass Business School found that employee-owned businesses (EOBs):

  • with fewer than 75 employees do significantly better on a profits-before-tax basis than non-EOBs
  • create jobs faster and experience greater employment growth than non-EOBs
  • have experienced significantly higher average yearly sales growth than non-EOBs since the 2008 recession, 11.08 per cent compared with 0.61 per cent.

Announcing the change, and the introduction of the first Employee Ownership Day on 4 July 2013, employment relations and consumer minister Jo Swinson said:

"Hundreds of businesses will benefit from the introduction of reforms that make direct employee ownership easier and simpler for both employers and employees.

Evidence shows that employee owned companies can be more profitable, create more jobs and were more resilient during the economic downturn. We are committed to making direct employee ownership more attractive, cutting red tape for companies, and promoting new and more responsible ways of running a business."