At the start of a company’s life, getting shareholders on-board seems like a great way to raise capital and promote growth.
But sometimes, further down the track of that company’s life, you and some of the other major shareholders start to think it might be easier to own the Company outright, thereby removing or reducing the accountability and level of reporting required when minor shareholders are involved, and putting all of the power back in your hands.
Can you affect a company buy-back?
It’s important to note first up that all of the other shareholders can exercise their powers under the Constitution and the Corporations Act as they choose and cannot be compelled to offer their shares for sale. Similarly, they can’t force you to buy back their shares.
The Corporations Act prohibits a company from acquiring shares in itself except as permitted within the Act. A company is permitted to buy back its own shares if:
- the buy-back does not materially prejudice the company’s ability to pay its creditors; and
- the company follows the procedures set out in Ch 2J.1, Div 2.
The procedure a company must follow in buying back shares differs depending on:
- the number of votes attaching to voting shares the company proposes to buy-back;
- the type of buy-back; and
- whether the entity is listed on the ASX.
The provisions in the Corporations Act recognise 5 basic types of share buy-back: equal access, on-market, employee share scheme, selective buy-back and minimum holding. Different rules also apply between share buy-backs involving 10% or less of the total shares to be bought back by the company within a twelve-month period, and share buy-backs involving over 10% (the 10/12 limit).
Equal access buy-back
An equal access scheme is a buy-back offer on the same terms and for the same percentage of shares made to every shareholder. All shareholders must be given a reasonable time to accept the offer, at the conclusion of which the buy-back agreement is effective.
On market buy-back
An on market buy-back is one conducted by a listed company on the ASX.
Employee share scheme buy-back
An employee share scheme buy-back enables a company to buy back shares held by current or former employees under an approved employee share acquisition scheme. It requires shareholder approval where the buy-back would exceed the 10/12 limit.
A minimum holding buy-back refers to the buying back of shares in a listed company that cannot otherwise be sold because they are below the “marketable parcel” value within the rules of the relevant financial market.
There are few requirements for a minimum holding buy-back. Generally, a letter of offer is sent to the Company’s shareholders to enter into an agreement to buy back the shares. Unlike most other share buy-backs, the company does not have to obtain the approval of its shareholders as a whole or notify ASIC of its intention to buy back the shares, even if the cumulative number of shares that will be bought back exceed the 10/12 limit.
A selective buy-back is a buy-back that does not fall within the definition of any of the following:
- minimum holding buy-back;
- equal access scheme buy-back;
- employee share scheme buy-back; or
- on-market buy-back.
For a selective buy-back, the terms of the buy-back agreement must be approved by the shareholders before it is entered into (section 257D Corporations Act). Alternatively, the buy-back agreement must be conditional on special approval being granted.
The terms of the buy-back agreement must be approved by either:
- a special resolution passed at a general meeting of the Company, where no votes are cast in favour of the resolution by any person (or their associates) whose shares are proposed to be bought back; or
- unanimous resolution of all ordinary shareholders at a general meeting.
If you’ve decided a buy-back is best for the future of your company, you will need to carefully consider the governing documents (constitution and shareholders agreement) and the applicable provisions of the Corporations Act before you do anything.
Talk to a commercial lawyer, who will be able to identify the applicable law and guide you through the process.