Question: What is a Selective Share Buy-Back?Answer:
A share buy-back occurs when a company buys back shares from a shareholder. Broadly speaking, a selective buy-back is when the company does not make identical offers to every shareholder. For instance, the price or percentage of share bought back differs for some shareholders.
The transaction results in a transfer of shares from the existing shareholder to the company. Unlike a share sale and purchase, the shares are cancelled, and any rights attaching to the shares are suspended after the company buys back the shares.
A common reason startups buy back shares is to acquire unvested shares from a departing shareholder whose shares are still subject to vesting provisions. The shareholders’ agreement typically sets out the terms of buy-back.
When Can a Company Buy Back Its Shares?
A company may buy back its shares only if:
- the share buy-back does not have a materially adverse effect on the company’s ability to pay its creditors;
- the company follows the procedure set out in Part 2J.1 Division 1 of the Corporations Act 2001 (the Act).