A share buy-back is a mechanism allowing a company to buy-back its shares from all or some of its shareholders. Under the Corporations Act 2001 (Cth) (‘the Act’), the Australian Securities and Investments Commission (ASIC) regulates share buy-backs. There are different types of share buy-backs, and each have their own set of procedures that the company must follow.
When might you conduct a share buy-back?
You may conduct a share buy-back if you would like to increase the individual value of each share. Sometimes reducing the number of shares in a company may effectively increase the value of individual shares.
A buy-back may also be necessary when:
- An individual shareholder dies, suffers total permanent disability, or declares bankruptcy;
- A company shareholder becomes insolvent and is wound up;
- A shareholder voluntarily exits the business; or
- A vesting shareholder leaves the business and has to forfeit their unvested shares.
The company’s shareholders agreement or constitution often sets out circumstances where there may be a requirement of a buy-back and associated terms. For example, if a shareholder dies, a company may buy back their shares for their fair market value, rather than the shares forming part of their estate. Doing so protects the company from having shareholders with no involvement in the business. Alternatively, if a shareholder has shares subject to vesting conditions and they do not fulfil these requirements, the shareholders agreement may say that the unvested shares can be bought back by the company for a nominal value.
Types of share buy-backs
There are three main types of share buy-backs for private companies:
- Equal-access buy-back,
- Selective buy-back,
- Employee share scheme buy-back.
For listed companies, there is also the on-market buy-back and the minimum holding buy-back.
The rules for each buy-back are different. Within each type, there are also different obligations on the company for buy-backs that involve 10% or less of the total shares purchased in a twelve-month period and buy-backs relating to more than 10% (referred to as the 10/12 limit). As a general rule, buy-backs relating to more than 10% (and therefore exceeding the 10/12 limit) face more onerous company obligations.
It is important to note that before a company can conduct any of the above buy-backs, it must first ensure that:
- The buy-back does not materially prejudice the company’s ability to pay its creditors; and
- It follows the relevant procedures set out in the Act.
Equal access buy-back
An equal access buy-back is used when all shareholders have an equal opportunity to access the buy-back, in proportion to their shareholding. Offers under the scheme can only relate to ordinary shares.
Each shareholder will receive an offer to buy-back their relevant percentage of ordinary shares, and each offer cannot be materially different. The offer should explain why the company is making the offer and steps it will be taking.
If the equal access buy-back exceeds the 10/12 limit, it can only go ahead following an ordinary resolution of shareholders (more than 50% of votes cast in favour of the buy-back). The company will give shareholders the relevant notice of the meeting (21 days for unlisted companies), including all relevant information material to their decision. However, this is not a requirement if the buy-back is under the 10/12 limit. Beyond this requirement, there are a number of steps that the company must carefully follow to ensure compliance with the Act.
- The company must give its shareholders and ASIC 14 days notice of the buy-back.
If there is a requirement of an ordinary resolution due to the 10/12 limit, before the shareholder’s notice is given, the company must lodge a copy of the notice of the meeting and any accompanying documents that relate to the buy-back that will be given to the shareholders, with ASIC. In effect, this is likely to push the notice period to 21 days. If there is no requirement for a resolution, the company must give notice and lodge it 14 days before entering a buy-back agreement. The notice requirement is to protect potential creditors by forewarning them of an event which may affect the company’s creditworthiness.
The company should use the ASIC Notification of share buy-back details (Form 280) for this purpose.
The company must also:
- Lodge the buy-back documents (including a document setting out the terms of the offer and any accompanying documents) with ASIC,
- In each offer to shareholders, include information known to the company and any material to assist shareholders in their decision to accept the offer,
- Once the shareholder accepts the offer, enters the agreement and the transfer of shares to the company is complete, cancel the shares; and
- Notify ASIC of the cancellation.
If a company isn’t going to offer the buy-back to all shareholders equally, it should conduct a selective buy-back. For example, a selective buy-back is appropriate when a company only plans to buy-back the shares of one departing shareholder.
Shareholders must approve a selective share buy-back (irrespective of the 10/12 limit in this case). Approval of such can be in the form of either:
- A special resolution of shareholders (75% of votes cast by shareholders) with no votes cast by any person whose shares are subject of a buy-back offer; or
- A unanimous resolution of shareholders (all shareholders).
Prior to the vote (and like the equal reduction requirements above), the company must:
- Lodge notice of meeting and associated documents with ASIC; and
- Provide notice of the meeting to shareholders (likely 21 days before the meeting and at a minimum, 14 days) and include all information known to the company, material to the shareholder’s decision to accept the offer, unless it has done so already.
As with the equal reduction requirements, the offer should include all information known to the company and material that would assist the shareholders with their decision. Upon acceptance of the offer and once the transfer of shares is complete, the company must cancel the shares and update ASIC of the cancellation.
Employee share scheme buy-back
An employee share scheme buy-back involves the buy-back of shares held by employees or salaried directors under an employee share scheme. Similar to the equal access buy-back, this requires an ordinary resolution of shareholders if it is over the 10/12 limit.
There are less onerous company obligations for these buy-backs. For example, there is no need to lodge the buy-back agreement with ASIC. However, the company must still comply with the 14 days notice rule set out. The company must also cancel the shares upon transfer and notify ASIC of the cancellation.
The need to conduct a share buy-back may arise in a number of different circumstances. It is important to remember that buy-backs are very procedural and compliance with the Act is necessary. You should first determine what type of buy-back is relevant for your circumstances. You should then ensure that you meet the eligibility criteria and are aware of your procedural obligations. If you require assistance with preparing a buy-back agreement and relevant notice documents, get in touch with one of LegalVision’s commercial lawyers on 1300 544 755.
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