Accounting & Tax

Share BuyBacks: Everything You Need to Know

Types of Share Buy Backs

Companies are able to issue shares — but they can also repurchase them through share buy-backs. What is a share buyback though, and how do they work?

Companies often perform share buy-backs for a wide range of reasons. In the second half of 2018, ASX-listed companies spent more than $50 billion on buybacks, a dramatic increase over the median figure of $16 billion annually since 2004.

Why do companies buy back their own shares and what is the purpose of a share buy-back? In simple terms, a share buy-back provides a company with the opportunity to purchase shares from some or all of its shareholders.

The rules around share buy-backs are governed by the Corporations Act 2001. There are a number of different types of share buy-back, each of which is associated with a specific procedure that must be followed.

What is the Purpose of a Share Buy-Back?

A company typically performs a share buy-back in order to increase the value of individual shares. In some cases, minimising the total number of shares available in a company — or reducing a company’s float — can increase the value of shares.

    Buy-backs can also be performed when:

  • A company becomes insolvent and is liquidated
  • When a shareholder voluntarily exits a company
  • When an individual shareholder declares bankruptcy, dies, or sufferers a permanent total disability
  • When a vesting shareholder leaves the business and is obligated to forfeit their unvested shares

The constitution of a company or its shareholder’s agreement may dictate specific circumstances in which a company may require a share buy-back. This practice can help to protect a company from having shareholders that have no specific involvement with the business.

If a shareholder dies, for example, the shares they own are likely to become a part of their estate. A company may offer to repurchase their shares at fair market value instead. The shareholder’s agreement of a company can also require that unvested shares be repurchased by a company in this scenario.

Vested shares are shares that a shareholder is able to act on and sell, in contrast with unvested shares, which can only be disposed of after a specific time period or the fulfilment of specific conditions. Unvested shares occur when a shareholder possesses shares and is unable to fulfil the conditions.

Share buy-backs can also assist a business in reducing its cost of capital, consolidate ownership, adjust important financial metrics, or, in some cases, allow a business to benefit from a temporary undervaluation of stock.

Different Types of Share Buy-Backs

    There are three primary types of share buy-backs available to private companies in Australia. These buy-backs are:

  1. Equal-access buy-backs
  2. Selective buy-backs
  3. Employee share scheme buy-backs
    There are also two additional buy-back categories available to listed companies — on-market buy-backs and minimum holding buy-backs. Each type of buy-back follows a different process. Each buy-back category can also contain subcategories of buy-backs. These subcategories divide buy-backs into two categories:

  • Buy-backs of less than 10 percent of the total shares purchased within a 12-month period
  • Buy-backs of over 10 percent of all shares purchased within a 12-month period — also referred to as the 10/12 limit

Different types of buy-backs carry different obligations. In most cases buy-backs of over 10 percent of all shares purchased within a 12-month period that exceed the 10/12 limit are subject to greater regulatory scrutiny and more complex company obligations.

    Before a company can conduct a share buy-back, they must fulfil a number of requirements such as:

  • Performing a share buy-back must not significantly inhibit the ability of a company to pay creditors
  • A buy-back must be performed in accordance with the relevant ASIC procedures

Equal Access Buy-Backs

A company may perform an equal access buy-back in order to invite all shareholders to participate in the buy-back. Shareholders are able to participate in the buy-back in proportion to their shareholding. Importantly, offers under the equal access buy-back scheme can only relate to ordinary shares.

All shareholders are offered a buy-back of their individual percentage of ordinary shares — all individual offers must not be significantly different from any other. A company providing an equal access buy-back offer will provide shareholders with an explanation of the motivation behind the offer and the steps the company will take.

Equal Access Buy-Back Requirements

    A company seeking to perform an equal access buy-back that exceeds the 10/12 limit may be required to fulfil a number of requirements outlined in an ordinary resolution. Before issuing a shareholder’s notice in this case, a company must:

  • Lodge a copy of the notice of the meeting with ASIC
  • Lodge any accompanying documents that will be issued to shareholders in relation to the equal access buy-back with ASIC

If there is no requirement for a resolution, a company must typically give notice to ASIC and lodge documents 14 days prior to entering a buy-back agreement. The above situation, however, extends the notice period to 21 days.

The notice period obligations that companies are subject to exist in order to protect potential creditors — notice periods provide creditors with forewarning of a buy-back that could potentially affect the creditworthiness of a company. The notice process is performed by submitting an ASIC notification of share buy-back details (Form 280).

Additional Requirements

    A company that performs an equal access buy-back must also:

  • Lodge any documents relevant to the equal access buy-back with ASIC, such as any documents that outline the terms of the offer and accompanying documents
  • Provide additional information to shareholders known to the company that may assist shareholders in their decision making process
  • Once shareholders accept the offer, enter the agreement, and when the transfer of shares to the company is complete, the shares must be cancelled.
  • ASIC must also be notified when shares are cancelled

Selective Buy-Backs

A company that intends to offer the repurchase of shares to shareholders in an asymmetric manner must conduct a selective buy-back. This process allows a company to offer a buy-back when it does not intend to offer the buy-back to all shareholders equally. A selective buy-back is appropriate in scenarios in which the company seeks to repurchase the shares of a single departing shareholder.

    A selective share buy-back must be approved by shareholders regardless of the 10/12 limit. Shareholder approval can be obtained via two methods:

  • A special resolution of shareholders with 75 percent of votes cast by shareholders. Votes cannot be cast by shareholders whose shares are subject to a buy-back offer
  • A unanimous resolution of all shareholders
    Prior to commencing the voting process a company must meet the following requirements:

  • The company must lodge a notice of the meeting and all associated documents with ASIC
  • The company must provide all information known to the company important to the shareholder decision making process to shareholders via a notice issued a minimum of 14 days prior to the meeting

In the same way as in equal access buy-backs, companies are obligated to provide shareholders with any information that could potentially affect their vote. Subsequent to the acceptance of the selective buy-back offer, the shares must be transferred and cancelled. ASIC must be notified of the cancellation of company shares.

Employee Share Scheme Buy-Backs

Employee share scheme buy-backs can be used by companies to repurchase the shares held by employees or salaried directors under employee share schemes.

The process involved in executing an employee share scheme buy-back is similar to an equal access buy-back — employee share scheme buy-backs require an ordinary resolution of shareholders should it exceed the 10/12 limit. Unlike equal access buy-backs, however, companies that execute employee share scheme buy-backs are subject to less complex obligations.

Companies that execute employee share scheme buy-back, for example, are not required to lodge the buy-back agreement with ASIC. A company must, however, follow the 14-day minimum notification period rule. Shares repurchased in an employee share scheme buy-back must also be cancelled upon transfer, with ASIC notified of the cancellation.

Summary

A company may choose to perform a share buy-back in a broad variety of different scenarios and circumstances. When performing a share buy-back it’s essential to ensure your company is fulfilling regulatory requirements and complying with all relevant laws.

It’s important to ensure that your company is performing the correct buy-back that is relevant for its particular circumstances and is aware of the relevant procedural obligations.

Share buy-backs can be complex, onerous processes. If you’re not sure which buy-back category is right for your company, reach out to Fullstack today for professional guidance.

Was this article helpful?
Yes
No
Share this ArticleShare on Facebook
Facebook
Tweet about this on Twitter
Twitter
Share on LinkedIn
Linkedin