A Company Own Share Purchase (COSP) is a statutory mechanism under the Companies Act 2006 that enables a company to buy back its own shares from shareholders.
For private companies limited by shares, this can be a powerful tool to facilitate shareholder exits in the event of retirement, disputes, or succession planning, often in a tax-efficient manner where capital gains tax treatment applies.
Following the Government’s October 2024 Budget, COSPs may become even more relevant. Amendments to Business Relief (BR) mean that personal representatives of deceased shareholders may now require access to liquid assets to settle inheritance tax liabilities on business assets exceeding the £1 million BR threshold. In this context, COSPs offer a strategic solution to unlock cash from the business.
The Legal Framework
To implement a COSP effectively, companies must adhere to a strict statutory process. Key requirements include:
- Distributable Reserves: Except in limited cases where a COSP out of capital is permitted, the company must have sufficient distributable profits to cover the purchase price.
- Cash Payment: The purchase price must be paid in full and in cash at the point of completion.
- Formal Agreement: A COSP agreement must be executed between the company and the selling shareholder and approved by the remaining members.
- Record Keeping: The agreement must be retained at the company’s registered office for 10 years.
- Regulatory Clearance: In certain cases, approval under the National Security and Investment Act 2021 may be required before completion.
Complications and Pitfalls
Failure to comply with these requirements can have serious consequences. The COSP can quickly go from a tax-efficient exit, maximising the return to the selling shareholder, to a legal nightmare for the company and remaining shareholders.
A defective COSP may be deemed void, meaning the selling shareholder remains legally entitled to vote, receive dividends and share in capital. This creates uncertainty around governance and ownership and may invalidate subsequent resolutions. Directors may also be exposed to personal financial liability for breaching statutory duties.
- Issues often surface only during major events such as tax planning or due diligence in a sale. Rectifying the position can be costly, time-consuming, and may even derail transactions. Some of the most frequent errors include:
- Insufficient Reserves: Undertaking a COSP without adequate profits, or structuring payment in instalments or on a deferred basis.
- Missing Agreement: Failing to enter into a properly approved COSP agreement with the selling shareholder.
- Lack of approval: Failing to have the COSP approved by the remaining members of the company before completion.
Getting it right
In recent months, we have seen several instances where COSPs have been implemented incorrectly, often stemmed from agreements that were not properly drafted or approved, resulting in legal uncertainty and potential financial exposure.
Despite the risks, COSPs remain a valuable tool when executed correctly. With specialist legal and tax advice, companies can navigate the complexities and unlock the intended benefits for all parties involved.
Engaging a lawyer to draft and review your COSP ensures that the process is legally sound, compliant with statutory requirements and tailored to your company’s specific circumstances. This proactive step can prevent costly mistakes and provide peace of mind that your exit strategy is robust and enforceable.
For further information on a COSP or if you require advice on any other corporate-related matters, please contact Matthew Ray at Matt.Ray@swinburnemaddison.co.uk or by telephone on 0191 384 2441.
