corporate & ASX listed clients
Our Gold Coast corporate lawyers are experts in conducting share buy backs for our corporate clients and ASX listed clients. We also provide tailored advice on whether shareholder approval is required in the circumstances and the process for cancelling shares that are reclaimed by a directors’ resolution.
Nature of the share buy back
A share buy back occurs when the company makes an offer to a shareholder to sell shares back to the company. By their nature, share buy backs are not compulsory, and it is a fundamental principle that any shareholder to whom the buy back is offered retains the discretion to refuse the offer. A buy back can therefore be distinguished from other forms of reduction of issued capital, such as via a selective capital reduction. A share buy back is a tool that can be utilised at various stages of a corporations life cycle, including where it seeks to increase earnings per share (by reducing the overall number of shares to which company profit applies), to remove volatility in the register of members or to bring the share price value and the company’s book value into closer correlation.
By contrast, a reduction in capital can allow a company to reduce the number of shares on issue and the amount recorded as received in consideration for those shares. An example of a reduction of capital is cancelling uncalled shares. A share buy back is essentially a form of reduction of capital as after the buy back the issued capital is reduced accordingly.
Share buy back procedure?
A share buy back can be implemented subject to the restrictions detailed in section 257A of the Corporations Act 2001 (Cth). Section 257A states that a company may only buy back its shares if to do so would not materially prejudice the company’s ability to pay its creditors and the procedure detailed in Chapter 2J Division 2 of the Corporations Act 2001 (Cth) is followed.
In some instances, the 10/12 limit rule applies, which stipulates that a company cannot buy back more than 10% of its voting shares within the span of any twelve (12) month period (note this restriction does not apply to shares that do not carry with them voting rights).
Companies do, however, retain a general capability to make a share capital reduction if the reduction is fair and reasonable to shareholders overall, does not materially prejudice the company’s ability to pay creditors and is approved by the shareholders pursuant to section 256C. Exactly what can be considered to not materially prejudice the ability to pay creditors is largely a commercial judgment that falls to the directors to contemplate.
The exact procedure for conducting a share buy back varies on the basis of the type of buy back procedure that a company seeks to rely upon. A table outlining the different procedures is available under section 257B of the Corporations Act 2001 (Cth).
More specifically, share buy backs can take the form of a minimum holding, an employee share scheme, on market, equal access or a selective buy back.
Once a share buy back is effected, an ASIC Form 280 must be attached to share buy back documents that are lodged with the Australian Securities and Investments Commission (‘ASIC’). In some circumstance a Form 281 may be required to evidence a company’s intention to conduct a share buy back. After one (1) month of cancelling shares ASIC must be notified.