A share buy-back allows a company to buy-back its shares from all or some of its shareholders. The Australian Securities and Investments Commission (ASIC) regulates share buy-backs. There are different types of share buy-backs, and each has its own set of procedures that you must follow.
Why Conduct a Share Buy-Back?
You may conduct a share buy-back if you want to increase the individual value of each share. Sometimes reducing the number of shares in a company may 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.
Your company’s shareholders agreement or constitution will often set out the circumstances where there may be a requirement of a buy-back and associated terms. Doing so protects your company from having shareholders with no involvement in the business.
Types of Share Buy-Backs
There are three main types of share buy-backs for private companies:
- equal-access buy-back;
- selective buy-back; and
- 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. There are also different types of buy-backs within each buy-back.
- 10% or less of the total shares purchased in a 12-month period; and
- buy-backs of more than 10% of the total shares purchased in a 12-month period (referred to as the 10/12 limit).
Each different type of buy-back has different obligations attached. 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 your company can conduct any of the above buy-backs, you must first ensure that:
- the buy-back does not significantly hinder the company’s ability to pay its creditors; and
- you follow the relevant procedures.
Equal Access Buy-Back
An equal access buy-back is used when all shareholders are offered 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 significantly different. The offer should explain why your company is making the offer and the steps you will be taking.
Requirements for Equal Access Buy-Backs
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). You will need to give shareholders the relevant notice of the meeting (21 days for unlisted companies), including all relevant information important to their decision. However, this is not a requirement if the buy-back is under the 10/12 limit. In addition to this requirement, there are several steps that your company must carefully follow to ensure compliance with the law.
Requirements When an Ordinary Resolution Is Needed
If there is a requirement of an ordinary resolution due to the 10/12 limit, before the shareholder’s notice is given, your company must lodge:
- a copy of the notice of the meeting; and
- any accompanying documents to be given to shareholders that relate to the buy-back 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. Your company should use the ASIC notification of share buy-back details (Form 280) for this purpose.
Your company must also:
- lodge the buy-back documents (including a document setting out the terms of the offer and any accompanying documents) with ASIC;
- include information known to your company and any material to assist shareholders in their decision to accept the offer when making each 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 you are not going to offer the buy-back to all shareholders equally, you should conduct a selective buy-back. A selective buy-back is appropriate when you only plan 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
- unanimous resolution of shareholders (all shareholders).
Prior to the vote (like the equal reduction requirements above), you 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). You must include all information known to the company and important to the shareholder’s decision to accept the offer unless you have done so already.
As with the equal access requirements, the offer should include all information and material known to your company that would assist the shareholders with their decision. Once the shareholder accepts the offer and the transfer of shares is complete, your company must cancel the shares and notify 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.
However, the company must still comply with the 14 days notice rule set out. Your 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 share buy-backs are very procedural and you must comply with the law and regulations. You should first determine what type of buy-back is relevant for your circumstances. You should then ensure that you meet the requirements and are aware of your procedural obligations. If you have questions about conducting a share buy-back, get in touch with one of LegalVision’s business lawyers on 1300 544 755.
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