A company may need to restructure its capital for many different reasons, including:
- To dispose of surplus cash without paying a dividend;
- To increase the value of its shares;
- To alter its loan to equity ratio; or
- To remove a shareholder without purchase of their shares by the remaining shareholders.
Whilst the first 3 of those examples may be driven simply by ‘balance sheet engineering’ considerations, the last one may be due the retirement, permanent incapacity or death of the selling shareholder (or even a falling out between that person and the other shareholders). In such a situation, a share buy-back offers a solution where the continuing shareholders cannot fund purchase of the departing shareholder’s shares, but the company itself can.
Exception to the general rule
Normally a company cannot buy its own shares unless they were issued as redeemable shares. (In some cases, the company’s constitution prohibits or limits the purchase of its own shares.) However, subject to such a prohibition or limit, Chapter 2J of the Corporations Act 2001 permits a company to buy back its shares, so long as it follows a strict procedure.
There are several different forms of share buy-backs, which are applicable in different circumstances. In this article we are only considering a ‘selective’ buy-back. A selective buy-back may be offered to all shareholders or only specific shareholders of a company.
The key rules
A share buy-back can be carried out so long as:
- It does not materially prejudice the company’s ability to pay its creditors; and
- The company follows the procedures specified in the Corporations Act.
Share buy-back procedure
In order to make a selective buy-back, in simplified form, the company must:
- Prepare an agreement setting out the terms of the share buy-back;
- Circulate to shareholders an information memorandum setting out all information that is material to a decision to approve the share buy-back;
- Lodge copies of the notice of a shareholders meeting and the information memorandum and notice of the intended buy-back with ASIC at least 14 days before the meeting or before the buy-back agreement is entered into; and
- Have a resolution passed in a general meeting approving the buy-back terms.
Following the passing of the resolution, the company can enter into the buy-back agreement with the affected shareholder(s). Then the shares can be transferred to the company in exchange for payment of the agreed price. Upon registration of the transfer, the shares are cancelled and must be notified to the Australian Securities and Investments Commission.
Advantages of a share buy-back
A key advantage of the share buy-back procedure is that it enables the company’s share capital to be varied without changes to the shareholdings of the continuing shareholders. There are, of course, tax considerations that need to be taken into account by both the company and the selling shareholder(s).
For advice on buy-back of some of your company’s shares and preparation of all necessary documents, please contact Michael Tyler, Special Counsel, on (02) 9411 4466.