A share buy-back is when a company makes an offer to buy back its shares from shareholders to cancel them. There are two common types of share 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. 

Share Buy-Backs

A share buy-back is when a shareholder receives an offer from a company to buy back some or all of their shares. In effect, the company is investing in itself, like a vote of confidence in the company by its management.

One advantage of buying back shares is that it increases the earnings per share on the remaining shares. It also means that those shareholders who want to sell their shares can do so while others can keep their entire holding.

When Can a Company Buy-Back Shares?

A company can buy back its shares if:

  • the buy-back does not materially prejudice the company’s ability to pay its creditors; and
  • the company follows certain procedures set out in the Corporations Act.

Types of Share Buy-Backs

If a company is buying back shares, you need to identify the type of buy-back you are undertaking. There are several types of share buy-backs which you should understand.

Type of Buy-BackDescription
Minimum holdingThis only applies to listed companies. It is where the company buys unmarketable parcels of shares from shareholders.
Employee share schemeThe company buys shares held by or for employees or salaried directors of the company or a related company.
On market buy-backThis only applies to listed companies. It is where a company buys back its shares in on-market trading on the stock exchange.
Equal access schemeThe company offers to buy back the same proportion of each shareholder’s shares
Selective buy-backThe company makes non-identical offers to shareholders to buy their shares.

Important Issues

  • Shareholders might need to approve the share buy-back. This will depend on the type of buy-back, and how many shares are being bought back. 
  • If the buy-back requires shareholder approval, copies of notices for the shareholder meetings must be lodged with ASIC. These will be included on its public register.
  • If sellers profit when selling their shareholding, they may be required to pay capital gains tax. The company might make special arrangements with the Australian Taxation Office to reduce the sellers’ tax liability.
  • Directors must ensure that a share buy-back does not cause the company to become insolvent.

Preparing for a Share Buy-Back

You must carefully implement a share buy-back to ensure that:

  • it is an effective way for a company to “exit” particular shareholders; or 
  • you can return surplus funds to shareholders.

The directors or shareholders may need to approve the buy-back depending on the type of buy-back, the Company Constitution or shareholders agreement (if the company has one). 

To pass the resolutions, the directors or shareholders will need to have a meeting. Accordingly, the company must: 

  • provide notice to all people who can attend the meeting; 
  • take minutes of the meeting; and
  • elect a chair to the meeting who should sign the minutes.  

If the directors or shareholders cannot hold a meeting in time, the minutes can be signed by a circular resolution. Directors or shareholders must pass the resolution. 

Notably, some buy-backs will still require minimum notice to be provided to shareholders. Therefore, even if the shareholders want to approve the resolution by a written or circular resolution, you still need to ensure that they have been given the minimum amount of notice before signing the resolution. 

Other Documents 

You may also need to complete other documents in addition to the buy-back agreement. This depends on whether the shareholder had other roles with the Company. For example, a shareholder may need to provide to the Company:

  • if the shareholder is a company, a copy of that company’s resolution agreeing to the buy-back of shares;
  • a letter of resignation as director, if the shareholder is a director of the Company;
  • if the shareholder is an employee of the Company, a letter of resignation as an employee;
  • a non-compete agreement with the Company; 
  • an Intellectual Property Assignment Deed with the Company; and 
  • copies of documents relating to the Company and business in its possession.

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. For more information, contact LegalVision’s business and commercial lawyers on 1300 544 755 or fill out the form on this page.

FAQs

What form should be lodged with ASIC?

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.

What happens to the Member Register?

The Company needs to update the member (shareholders) register accordingly.

What happens if a share buy-back causes the company to become insolvent?

The liquidator may be able to recover compensation from the selling shareholders.

What is an employee share scheme buy-back?

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.

Get in Touch

Fill out the form below and a LegalVision team member will be in touch shortly!

  • 2020 Excellence in Technology & Innovation – Finalist – Australasian Law Awards 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice – Winner – Australasian Lawyer 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards 2021 Law Firm of the Year - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer