- A share buy-back is when a company makes an offer to buy back its shares from shareholders to either cancel them or hold them for re-issue later.
- There are two common types of buy-backs: an equal access scheme and a selective buy-back.
- The Corporations Act 2001 (Cth) prohibits a company from acquiring shares in itself except as permitted within the Act.
A share buy-back is when a shareholder receives an offer from a company to buy back some or all of their shares in a company. In effect, the company is investing in itself, and this can be seen as a vote of confidence in the company by its management.
One advantage of buying back the shares is that it increases the earnings per share on the remaining shares. It also means that those shareholders who want out can do so while others can stay with their entire holding.
When a Company Can Buy-Back Shares
A company is permitted to buy back its shares if:
- the buy-back does not materially prejudice the company’s ability to pay its creditors; and
- the company follows the procedures set out in Ch 2J.1, Div 2 of the Corporations Act.
Types of Share Buy-Backs
Where a Company is buying back shares the Company should identify the type of buy-back you are undertaking, is it a:
- Minimum holding;
- Employee share scheme;
- On market buy-back;
- Equal access scheme; or
- Selective buy-back.
An equal access scheme is when the company offers to buy back the same proportion of each shareholder’s shares. A selective buy is where a scheme, approved by all shareholders, offers non-identical shares to different classes of shareholders.
- Shareholders may be required to approve the share buy back. Copies of notices must be lodged with ASIC for inclusion on its public register.
- If sellers make a profit when selling their shareholding, they may be required to pay capital gains tax. The company may make special arrangements with the Australian Taxation Office to reduce tax liability.
- Directors must ensure that a share buy-back does not cause the company to become insolvent.
Preparing for a Share Buy-Back
A share buy-back needs to be carefully implemented to ensure it is an effective way for a company to exit particular shareholders or return surplus funds to shareholders.
Company Meeting and Minutes of Resolution
The Company may need to hold the following, depending on the type of buy back being undertaken:
1. A Company meeting and minutes, or
2. If it cannot hold a meeting in time, then the minutes can be signed by a circular resolution.
This depends on whether the shareholder had other roles with the Company. For example a shareholder may be required to provide to the purchaser:
- a copy of the Company resolution agreeing to the buy-back of shares;
- if the shareholder was a director of the Company, a letter of resignation as director;
- if the shareholder was an employee of the Company, a letter of resignation as an employee;
- a non-compete agreement with the Company, and an Intellectual Property assignment deed with the Company and copies of documents relating to the Company and business that is in its possession.
Frequently Asked Questions about Share Buy-Backs
Q: What form should be lodged with ASIC?
A: Companies should lodge a Form 280/281 with ASIC to notify them of the buy-back within 14 days. After the buy-back, companies should notify ASIC of the change of Company details by lodging a Form 484 within 28 days.
Q: What happens to the Member Register?
A: The Company needs to update the member (shareholders) register accordingly.
Q: What happens if a share buy-back causes the company to become insolvent?
A: The liquidator may be able to recover compensation from the selling shareholders.
Q: What is an employee share scheme buy-back?
A: An employee share scheme buy-back is where a company buys back shares held by or for employees or salaried directors of the company or a related company. This requires an ordinary resolution if over the 10/12 limit.
How can LegalVision help me?
LegalVision provides businesses and individuals with tailored online legal advice, including share buy back schemes. If your company plans to offer to buy back its shares from shareholders, we can assist in ensuring it complies with ASIC regulations and the Corporations Act.