If you hold shares in a company that you no longer want, you have several options when it comes to disposing of them. The two primary ways in which you may consider disposing of the shares that you hold in your company are to either: 

  1. have the company buy-back the shares (share buy-back); or
  2. sell the shares to an existing shareholder or third party (share sale/transfer).

There are several key differences between a share buy-back and a share sale. Which option is appropriate will largely depend on the circumstances and why you are disposing of those shares. This article will discuss: 

  • the differences between a share buy-back and a share sale; and 
  • under which circumstances each might be appropriate.

What Is A Share Buy-Back?

A share buy-back involves the company buying back some of its shares. The company will use its own money to purchase those shares. Once the company buys back those shares, they will cancel them and no longer hold these shares. Once the shares are cancelled, the total share capital of the company is reduced. This means that each remaining shareholder will hold a larger percentage of the company’s share capital.

For example, if there are four shareholders in a company and each holds 25 out of 100 shares, they each own 25% of the company. If one shareholder has their shares bought back by the company, each of the remaining three shareholders will now own 33.3% of the company.

There are a number of steps that you will need to follow to undertake a share buy-back. If you are considering having only your shares bought back by the company, you will undertake a ‘selective share buy-back’. A selective share buy-back involves the company buying back shares from its shareholders in uneven proportions.

For example, if the company proposes to only buy back your shares and do not offer to buy back the other shareholders’ shares in the same proportions, this would be a selective buy-back.

The company’s shareholders will need to be informed of a proposed selective buy-back and give their approval. Given that a company uses its own funds to buy-back shares, shareholder consent is necessary. The company must give all sufficient information to both the company’s shareholders and the Australian Securities and Investment Commission (ASIC). It is important to ensure that your company complies with all relevant notice and timing requirements set out by ASIC.

What Is A Share Transfer?

A share transfer (or share sale) involves one shareholder selling their shares to another shareholder or a third party. The selling shareholder and the purchaser will agree on a price for the shares, and the purchaser will pay that price directly to the seller. A share transfer does not affect the total number of shares on issue, but rather affects the number of shares that the seller and the buyer hold each. Your company’s register of members will reflect the sale by showing a reduction in the number of shares that the selling shareholder holds. The purchasing shareholder’s holding will increase by that amount, or if the purchaser is a new shareholder, they will be added to the members register with that number of shares.

Usually, a share transfer is accompanied by a share sale agreement, which will set out the terms of the sale, including:

  • the purchase price; and
  • any conditions.

The Share Transfer Process

To undertake the actual share transfer, the buyer and seller will need to sign a share transfer form. The company will also need to prepare a share certificate for the shares to give to the buyer. From here, the company will:

  • update its register of members to reflect the transfer; and
  • notify ASIC within 28 days of the transfer.

Importantly, many companies will provide their shareholders with pre-emptive rights over any share transfer. This means that before a share transfer can occur, the company must offer the shares to all existing shareholders, according to the proportion of shares that they currently hold. If the existing shareholders do not want to purchase the shares, the seller may sell them to a third party. In some cases, this third party will also need to be approved by the board.

The company’s governing documents will set out the exact process for a share transfer. Typically, the company’s shareholders agreement will set out the transfer process. If the company does not have a shareholders agreement, you should refer to the company constitution to confirm the specific requirements.

What Are the Key Differences?

The key differences between a share buy-back and a share transfer relate to:

  • who pays for the shares; and
  • the effect on the company’s share structure.

In a share buy-back, the company pays the selling shareholder for their shares. In a share transfer, the buyer will pay the selling shareholder for their shares. 

With respect to the company’s share structure, a share buy-back will affect the total number of shares that the company has on issue. When your company undertakes a share buy-back, it will cancel the shares that it buys back. As a result, the number of shares subject to the share buy-back will reduce your company’s share capital. Where a share transfer occurs, the total number of shares on issue remains unchanged but the holders of those shares will change.

A share buy-back may be appropriate where:

  • a shareholder must forfeit unvested shares (shares that the company has a right to repurchase if certain events occur); or
  • all shareholders are happy for the company to pay the selling shareholder for the shares.

A share transfer may be more appropriate where: 

  • one particular shareholder wishes to increase its shareholding and purchase the shares; or
  • the seller wishes to sell to a third party.

Tax Implications

If you are selling your shares, it is important to consider the potential tax consequences associated with either approach. When you sell your shares, this will be considered a disposal. This means that you may make a capital gain on the sale. The capital gain on the sale of your shares will be the difference between the price that you paid for the shares (known as the cost base) and the selling price (known as the capital proceeds). Any capital gain will be taxed at your marginal tax rate.

With a share buy-back, the capital proceeds may be calculated according to what the share’s market value would have been if the:

  • share buy-back never occurred; and
  • buy-back price is less than market value. 

As a result, the capital gain will be higher. This is because there is a larger difference between the cost base and the capital proceeds.

For example, if the purchase price of the shares was $1 and the market value of the shares is $100, you will incur capital gains tax on $99, regardless of the buy-back price. Therefore, if the buy-back price was $2 and the only actual capital gain was $1, you will still get taxed on the $99 capital gain.

Key Takeaways

While both a share buy-back and a share transfer involve you selling your shares, both involve different processes and have different implications for both the company and yourself. A share buy-back and a share transfer are also used in different situations, depending on the: 

  • reason for the sale; and 
  • outcome that the company or shareholder is looking to achieve. 

If you are considering a share buy-back or a share transfer, it is important to choose the appropriate option and follow the correct process. If you need help with a share buy-back or a share transfer, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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