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When starting a company, getting shareholders on board seems like a great way to raise capital and promote growth. But sometimes, further down the track, you and other major shareholders may feel it is easier to own the company outright. The effect is removing or reducing accountability and reporting that is necessary when you involve minor shareholders. Owning the company also places the power back in your hands. A company buy-back may be a solution to this situation. A company buy-back is when the company offers shareholders to purchase some or all of their shares. This article will outline:

  • how to force a company buy-back;
  • the types of company buy-backs; and
  • additionally reporting considerations with ASIC.

Can You Affect a Company Buy-Back?

Firstly, it is essential to note that all other shareholders can exercise their powers under the company constitution and the Corporations Act as they choose. You cannot compel them to offer their shares for sale. Similarly, shareholders cannot 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 can purchase its own shares if the:

  • buy-back does not materially prejudice the company’s ability to pay its creditors; and
  • company follows the procedures set out in the Corporations Act.

Moreover, 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.

Five Types of Share Buy-Backs

The provisions in the Corporations Act recognise five 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 repurchased by the company within twelve months and share buy-backs involving over 10% (the 10/12 limit). The rules are less demanding for share buy-backs involving 10% or less of the total shares.

Equal Access Buy-Back

An equal access scheme is the most straightforward form of share buy-back. An equal access scheme is a buy-back offer on the same terms and for the same percentage of shares that a company makes to every shareholder. A company must give all shareholders a reasonable time to accept the offer. Afterwards, the buy-back agreement is effective. If the proposed buy-back is more than 10% of the total shares, exceeding the 10/12 limit, a company must pass an ordinary resolution

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 repurchase shares that a current or former employee holds. The sale falls under an approved employee share acquisition scheme. It also requires shareholder approval where the buy-back would exceed the 10/12 limit.

Minimum Holding

A minimum holding buy-back refers to buying shares in a listed company that the company cannot otherwise sell. This is 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 agree to buy back the shares. 

Unlike most other share buy-backs, the company does not have to obtain its shareholders’ approval or notify ASIC of its intention to buy back the shares. This is the case even if the cumulative number of shares to be repurchased exceeds the 10/12 limit.

Selective Buy-Back

A selective buy-back is a buy-back where a company makes different offers to shareholders. In this circumstance, the company may only offer a buy-back to one shareholder and not other shareholders. For a selective buy-back, shareholders must first approve the buy-back agreement’s terms.

Alternatively, the buy-back agreement may be conditional on the granting of special approval. The 10/12 limit rule does not apply to this form of share buy-back. The terms of the buy-back agreement must be approved by either:

  • members passing a special at a general meeting of the Company. No votes are cast in favour of the resolution by any person (or their associates) whose shares are proposed to be bought back; or
  • a unanimous resolution of all ordinary shareholders at a general meeting.

The company must notify ASIC of a selective share buy-back. ASIC is to be given 14 days notice before shareholder approval and implementation of the share buy-back. Once the selective share buy-back occurs, you must update your company records with ASIC to reflect these changes. 

Additional Considerations

For most share buy-backs, the company must lodge a notification of share buy-back details (Form 208) with ASIC before sending a notice of meeting and share buy-back documents to shareholders. This form sets out the details relating to the proposed share buy-back. You must also update details of the share buy-back with ASIC following its implementation. 

When entering a share buy-back agreement, the company director’s responsibility is to ensure the company remains solvent. Directors may become personally liable if a company becomes insolvent after a share buy-back.

Key Takeaways

You may be considering that a buy-back is best for the future of your company. In that case, you will need to carefully consider governing documents like your company’s constitution and shareholders agreement and the applicable provisions of the Corporations Act. For more information or assistance with your company’s structure, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a company buy-back?

A company buy-back is when the company offers shareholders to purchase some or all of their shares. The effect is 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.

What are the different types of share buy-backs?

There are five basic types of share buy-back, including equal access, on-market, employee share scheme, selective buy-back and minimum holding.

Can you affect a company buy-back?

A company can purchase its own shares if the buy-back does not materially prejudice its ability to pay its creditors. Another provision is that the company follows the procedures set out in the Corporations Act.

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