Corporate and Business Law (Global) · Share capital

Share Buybacks and Redemption of Shares in Company Law

Updated 11 October 2026 · Fact-checked

A company can buy back its own shares or redeem redeemable shares only if the law and its constitution allow it. The shares must be fully paid, other shares must remain in issue, and payment normally comes from distributable profits or a fresh share issue. Approval is by ordinary or special resolution, depending on the method.

Understand Share Buybacks and Redemption of Shares

Normally a company cannot buy its own shares. That would return money to members and leave creditors with less protection. This is the capital maintenance principle. Buybacks and redemptions are the controlled exceptions.

Redemption applies to shares issued on terms that the company or the holder can make the company repurchase them. Purchase (buyback) applies to ordinary shares or any shares that were not issued as redeemable. In both cases the company pays the shareholder and the shares are normally cancelled, so the issued share capital falls.

The rules protect creditors. Shares must be fully paid, so the company never has an unpaid liability to chase. The company must keep at least some shares in issue that are not redeemable, so it is never left with no members holding ordinary risk. Payment must be made on purchase, not deferred.

Funding is the main exam point. The normal source is distributable profits, or the proceeds of a fresh issue of shares made for the purpose. When profits are used, an amount equal to the nominal value of the shares is moved to a capital redemption reserve. This reserve is treated like share capital and cannot be paid out as a dividend. Many legal systems let a private company pay out of capital as a last resort, but only with strict safeguards: a directors' solvency statement, a special resolution and an auditor's report.

Approval depends on the method. A market purchase is made on a recognised stock exchange and needs authority by ordinary resolution. An off-market purchase is made by private contract with a shareholder and needs the contract approved by special resolution. The selling member cannot use the votes on their own shares to carry that resolution. Rules differ between jurisdictions, so answer from the general principles ACCA tests.

Financial assistance is a related topic. It means a company giving help, such as a loan or guarantee, so that someone can buy its shares. Many systems restrict this, especially for public companies, because it can drain the company's assets for the benefit of a buyer. Treat it as a separate rule and check the facts for who is buying and who is helping.

Key formulas to remember

Conditions for a valid buyback or redemption: Shares fully paid + other non-redeemable shares remain + payment on purchase + lawful funding + correct approval; If any one of these fails, the purchase is unlawful. Check each in turn.
Permitted funding: Distributable profits OR proceeds of a fresh share issue (private company: capital only with statutory safeguards); Profits are the normal source. Capital is an exception for private companies only.
Capital redemption reserve: Transfer to CRR = nominal value of shares bought − fresh issue proceeds used; If funded wholly from profits, transfer the full nominal value. The reserve cannot be distributed.
Market purchase approval: Market purchase = recognised stock exchange + ordinary resolution authority; The authority sets a maximum number of shares, a price range and a time limit.
Off-market purchase approval: Off-market purchase = contract approved by special resolution (seller's votes excluded); A special resolution needs at least 75% of votes cast. The contract must be available to members before the vote.

How to solve Share Buybacks and Redemption of Shares questions

Use this order for any scenario on a company buying or redeeming its own shares.

1Identify the transaction: redemption of redeemable shares, buyback of other shares, or a financial assistance issue.
2Check the shares are fully paid and that other non-redeemable shares will remain in issue.
3Identify the type of company: public or private. This decides whether payment out of capital is possible.
4Identify the funding source: distributable profits, fresh issue proceeds, or capital. Compare the amount needed with the amount available.
5Decide whether it is a market or off-market purchase and name the correct resolution.
6Work out the accounting effect: share capital reduces by nominal value, premium comes from profits, and the capital redemption reserve is credited.
7State the conclusion clearly: lawful or unlawful, and the reason in one sentence.

Quickest way: Five-point check for objective questions

When to use it: Use in Section A and Section B objective questions where four options differ on the funding source, the resolution or a condition.

Look for the keyword: market, off-market, redeemable, capital, or assistance.
Market means ordinary resolution. Off-market means special resolution.
Check funding: profits or fresh issue is normal. Capital is only for private companies with safeguards.
Check the shares are fully paid and some shares remain.
Eliminate options that allow public companies to pay from capital or that allow partly paid shares.

Common mistakes in Share Buybacks and Redemption of Shares

Mixing up the resolution needed for market and off-market purchases.
Both involve member approval and the names sound alike.
Fix: Link the word 'market' with ordinary and 'off-market' with special. The private contract needs the higher vote.
Saying partly paid shares can be bought back.
Students focus on the price and ignore the paid-up condition.
Fix: Always check whether the shares are fully paid before anything else.
Allowing a public company to pay out of capital.
Students remember the capital route but forget it is only for private companies.
Fix: Tie the capital route to private companies with a solvency statement, special resolution and auditor's report.
Forgetting the capital redemption reserve.
Students think only about cash leaving the company.
Fix: When profits fund the purchase, move the nominal value of the shares to the reserve. This keeps capital protected.
Treating financial assistance as the same thing as a buyback.
Both relate to buying shares and both are in the same chapter.
Fix: In a buyback the company is the buyer. In financial assistance someone else buys and the company helps them.
Allowing the selling shareholder to vote on the off-market approval.
Students assume every member votes on every resolution.
Fix: Note that the seller's shares are not counted in carrying the special resolution.

Worked examples

Example 1

Mira Ltd, a private company, has 40,000 ordinary shares of $1 each, fully paid. Distributable profits are $50,000. The company buys back 10,000 shares from a retiring director at $4.50 each, funded only from profits. State the effect on share capital, distributable profits and the capital redemption reserve.

Show the solution

The shares are fully paid and 30,000 ordinary shares remain in issue, so the conditions are met.
Total price = 10,000 × $4.50 = $45,000. This is less than the $50,000 of distributable profits, so profits are sufficient.
Share capital falls by the nominal value: 10,000 × $1 = $10,000. New share capital = $30,000.
The premium is 10,000 × $3.50 = $35,000. It is paid from profits.
Transfer the nominal value of $10,000 from profits to the capital redemption reserve.
Distributable profits after the purchase = $50,000 − $35,000 − $10,000 = $5,000.

Answer: The purchase is lawful. Share capital falls to $30,000, a capital redemption reserve of $10,000 is created, and distributable profits fall to $5,000. The reserve cannot be distributed.

Example 2

Which ONE of the following is correct for a company that wants to buy back its own shares from a single shareholder by private contract? (A) Ordinary resolution authorises the contract. (B) The contract must be approved by special resolution, and the seller's votes cannot help carry it. (C) No resolution is needed if the shares are fully paid. (D) Board approval alone is enough if the company pays from capital.

Show the solution

A private contract with a shareholder is an off-market purchase, not a market purchase.
Off-market purchases need the contract approved by special resolution. This rules out A.
Fully paid shares are a separate condition, not a replacement for member approval. This rules out C.
Board approval alone is not enough, and paying from capital has its own safeguards. This rules out D.
The seller's votes are excluded when counting the special resolution. This matches B.

Answer: B. An off-market purchase needs a special resolution, and the seller's votes do not count towards carrying it.

Exam tips

In objective questions, find the single trigger word first: market, off-market, capital, redeemable or assistance. It usually points straight to the answer.
For a constructed-response question, use headings: conditions, funding, approval, accounting effect, conclusion. This makes the marks easy to find.
Check the numbers in any calculation: price, nominal value, premium and available profits. Mistakes here lose marks even when the law is right.
Always say who the rule protects. Creditors and remaining members are the usual answer, and it earns marks in written explanations.
Read the company type carefully. 'Public' or 'private' often decides the funding and assistance rules.

Practice questions from Share capital

Share Buybacks and Redemption of Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Share Buybacks and Redemption of Shares: frequently asked questions

What is the difference between redemption and purchase of own shares?

Redemption applies to shares issued as redeemable, so the terms are set when they are issued. A purchase is a buyback of shares that were not issued as redeemable. The funding rules are similar, but a purchase also needs member approval.

What is the difference between a market and an off-market purchase?

A market purchase is made on a recognised stock exchange and needs authority by ordinary resolution. An off-market purchase is a private contract with a shareholder and needs a special resolution. The seller's votes are excluded for the off-market resolution.

How can a company pay for a buyback?

The normal sources are distributable profits or the proceeds of a fresh issue of shares. A private company may be allowed to pay out of capital, but only if it follows strict safeguards. A public company cannot use that route.

Why does the capital redemption reserve exist?

When profits are used to buy shares, share capital falls and creditors lose some protection. The reserve replaces the lost capital by keeping an equal amount that cannot be paid out as dividends.

What is financial assistance for the purchase of own shares?

It is help given by a company, such as a loan, gift or guarantee, so that another person can buy its shares. Many systems restrict it, especially for public companies, because it uses company assets to fund the buyer. Check the exact rule in the question.