Managing shares is an important part of running a company. There are many ways in which shares can be managed in order to increase the individual value of shares.
A share buyback occurs when a company buys back shares from its shareholders, which has the effect of reducing the total number of shares issued by the company and increasing the proportionate ownership of the remaining shareholders.
The buyback procedure is carefully regulated by the Australian Securities and Investments Commission (ASIC). To give proper effect to a buyback and avoid running into serious issues with ASIC, a company must follow a set of important administrative procedures.
Generally, these administrative procedures include:
- Determining what type of buyback is being conducted;
- Obtaining the approval from the shareholders of the company (where necessary);
- Preparing & lodging the required notices with ASIC; and
- Disclosing certain information to shareholders.
Why Do Companies Buy Back Shares?
There are many reasons for and strategies to support a company’s decision to buy back its shares.
Some of those are:
- To increase the price per share. Reducing the total number of shares issued by a company means that each individual share is worth more, so each remaining shareholder’s shares are greater in value. This can also have a positive impact on the company’s valuation, which can be a good strategy to attract investors as it may suggest that the company is financially healthy.
- Where a shareholder dies or becomes bankrupt or insolvent.
- Where a shareholder wishes to exit the company, or the company wishes to push a certain shareholder out of the company.
- For public companies, when the company believes it’s shares are discounted in the market, which may be due to economic or political factors.
There can also be negative financial effects of buying back shares, so it’s always important to seek advice from a professional before buying back shares to ensure the buyback isn’t actually detrimental to the company in the medium to long term.
Types Of Share Buybacks
There are several different types of share buybacks, each of which are appropriate in certain circumstances and have rules that must be followed.
As we’ll consider below, there are onerous requirements on companies buying shares back from its shareholders – however, some types of buybacks fall in the “10/12 limit” and are therefore subject to lesser requirements. The 10/12 limit applies to the purchase of shares that are 10% or less of its total voting shares within a 12 month period.
The three main types of share buybacks are:
- Equal access buybacks
- Selective buybacks
- Employee share scheme buybacks
Equal Access Buyback
In an equal access buyback, all shareholders are entitled to purchase the shares on offer in the same percentage of shares they currently hold in the company.
Offers to each shareholder should be on mostly the same terms (allowing only differences where adjustments for things such as dividend entitlements are required).
If the buyback is under the 10/12 limit, an ordinary resolution (i.e. more than 50% of votes in favour) is not required.
A selective buyback occurs where the offer to buyback shares is not made to all shareholders – for example, an offer to only one shareholder.
This may occur where the company no longer wants a particular shareholder to have an interest in the company, such as if a shareholder is convicted of a crime.
The selective buyback of shares must either be approved by all shareholders or by a special resolution (requiring a 75% majority). The 10/12 limit does not apply to this type of buyback.
Employee Share Scheme Buybacks
A company may buy back shares from an employee if the shares were issued as part of an employee share scheme when the employee ceases their employment with the company.
This is because many shareholder agreements specify that an employee is only entitled to their shares while they’re employed by the company.
If the buyback falls below the 10/12 limit, an ordinary resolution is not required for this type of buyback.
Steps To Give Effect To The Buyback
Under the Corporations Act 2001, a company may buy back its own shares if the buyback does not affect the company’s ability to pay back its creditors, and the company follows the steps set out in the Corporations Act.
There are important administrative steps that need to be followed to fulfil the requirements of the Corporations Act. The below table summarises which steps need to be taken for each type of buyback.
|Type of buyback||Lodge offer docs with ASIC||Shareholder resolution required||Disclosure requirement|
|Equal Access Buyback (within the 10/12 limit)||✓||✗||✓|
|Equal Access Buyback (over the 10/12 limit)||✓||✓Ordinary resolution||✓|
|Selective Buyback||✓||✓Special resolution||✓|
|Employee Share Scheme (within the 10/12 limit)||✗||✗||✗|
|Employee Share Scheme (over the 10/12 limit)||✗||✓Ordinary resolution||✗|
- Lodge Offer Documents With ASIC (if required)
Depending on the requirements set out above, certain documents need to be lodged with ASIC before a Buyback Agreement is entered into.
The relevant ASIC form that a company needs to lodge is Form 280. The documents that need to accompany Form 280 depend on the requirements of that particular share buyback.
Along with the documents set out in the following sections (if required), a company must lodge with ASIC:
- a document setting out the terms of the offer (most likely the Share Buyback Agreement); and
- any document that is to accompany the offer.
Notice Of Shareholder Meeting
Certain buybacks require the approval of shareholders (either ordinary or special).
If a shareholder resolution is required (see table above), the company must prepare a notice of the shareholders meeting and an information sheet, including all information that is material to the decision on how to vote on the resolution.
The company must lodge the notice of meeting and information sheet with ASIC before sending it out to the shareholders.
This lodgment should occur at least 14 days before the resolution is passed by the shareholders.
If the disclosure requirement applies to a share buyback, a company must include with that offer a “statement setting out all information known to the company that is material to the decision whether to accept the offer”.
- Send Notice of Shareholder Meeting
The next step is to send the Notice of Shareholder Meeting to the shareholders of the company (if shareholder approval is required – see table above) as lodged with ASIC, along with any accompanying documents (such as the Share Buyback Agreement and disclosure statement).
- Hold Shareholder Meeting
At least 14 days after step 3 is completed above, the shareholder meeting approving the shareholders resolution to buyback shares should occur.
The shareholder who is selling their shares back to the company should attend the meeting, but not vote.
On completion, the conditions of completion as set out in the Share Buyback Agreement should occur. This can occur on the day of the shareholder meeting, or on any later date agreed between the parties.
This usually includes an obligation on the company to pay an agreed some of money for the shares, the shareholder to resign as a director and undertake any handover activities, and any other requirements specific to the particular buyback.
- Update ASIC and Cancel Shares
The company should update their share register to reflect the change in share structure post-completion.
In each of the above scenarios, the shares subject of the buyback are cancelled on registration of the transfer of the shares to the company.
Within 28 days of the share cancellation, the company must notify ASIC of the number of shares cancelled and the amount paid by the company on the buyback.
Why Are Share Buybacks Carefully Regulated?
Share buybacks are carefully regulated to protect the interests of both the shareholders of a company and the company itself.
The procedures set out above require companies to disclose information relating to the buyback, so shareholders have the opportunity to consider if the terms of the buyback are in their interests.
It also promotes fairness between shareholders and ensures that controlling shareholders can’t buyback shares at an exorbitant price.
If a company fails to abide by ASICs regulations regarding share buybacks, ASIC may take enforcement action against those members of the company involved in the buyback.
What Is A Share Buyback Agreement?
A Share Buyback Agreement is a legal contract required if your company is planning on buying back shares— it is often set out within the company’s Shareholders Agreement or Constitution — which allows the company to buy back its shares from all or some of its shareholders in certain situations.
A Share Buyback Agreement typically includes clauses regarding:
- Parties involved
- Number of shares
- Price of shares
- Representations on behalf of both parties
Need Help With A Share Buyback Agreement?
If you’re organising a share buyback for a company, or you’re a shareholder of a company that is buying back shares, it’s important to seek legal advice to make sure you’ve fully considered the implications of the buyback and ASIC’s regulations are followed.
At Sprintlaw, we have a team of experienced lawyers who can assist you with drafting or reviewing a Share Buyback Agreement, and advise you on what you need to do at each step of the process.
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