Originally Published Friday 11th July 2008
Share buy-backs enable companies to reduce their issued share capital. Ideally this is to make better use of funds that are superfluous to operational needs. Advantageous applications include:
- providing shareholders a price nearer to asset value, if share price is below Net Tangible Assets (NTA) backing
- bolstering earnings per share
- making good investment of surplus funds
- returning surplus funds
- removing instability in the company's register of members
- reducing registry costs in a listed company by eliminating odd lot holdings
- enabling employees to reduce employee plan shares
- enabling a retiring proprietor to be bought out in proprietary and joint venture companies
- facilitating a large holder exit without an overhang on the market, if crossing the holding to other investors is not timely.
Share buy-backs differ from other forms or reduction of issued capital, in that shareholders are given the choice of whether or not to sell. Buy-backs are only permitted where doing so will not materially prejudice the company's ability to pay its creditors and the company adheres to the somewhat complex provisions of the Corporations Act 2001(Cth).
Types of buy-backs
Equal access buy-backs:
- are characterised by uniform offers to each shareholder to buy-back a uniform percentage of each shareholder's ordinary shares
- must give shareholders reasonable time to accept, at the conclusion of which the buy-back agreement is effective
- require shareholder approval, where the buy back and those in the preceding 12 months exceed 10% of lowest number of voting shares in preceding 12 months (10/12 limit).
- are applicable to any type of shares (including redeemable preference shares)
- require a special resolution of members, to protect other shareholders from change of control or fair good terms
- are time-consuming and expensive
- are beneficial to a company that wishes to facilitate the exit or re-arrangement of particular shareholdings.
Employee share scheme buy-backs:
- enable a company to buy-back shares held by current or former employees under an approved employee share acquisition scheme
- require shareholder approval where the buy-back would exceed the 10/12 limit.
Minimum holding buy-backs (or "odd lot buy-backs"):
- eliminate small parcels which are not marketable parcels under the Exchange Rules
- do not require shareholder approval
- remove shareholders whose investment is not large enough to justify the cost of shareholder communications and register maintenance.
- enable a listed company to buy its shares in the ordinary course of trading on the stock exchange, provided that it complies with ASX Listing Rules as well as the Corporations Act
- require an ordinary resolution where the on-market buy-back would exceed the 10/12 limit.
Buy-back procedure – unlisted companies
The following outlines the major steps in a traditional buy-back process for an unlisted company:
At least 14 days before:
- the buy-back agreement is entered into, or
- if the buy-back is conditional on the passing of a resolution, at least 14 days before the resolution is passed,
the company must notify ASIC of its intention to buy-back its shares (unless it is undertaking an odd-lot buy-back) by providing ASIC with:
- the buy-back offer documents
- Form 280 (Notification of share buy-back details)
- where shareholder approval is required, the notice of meeting and accompanying documents sent to shareholders.
- The company must provide the shareholders with a buy-back offer and await acceptance. For equal access schemes and selective buy-backs, the offer documents must include a statement setting out all the information known to the company that is material to the decision of whether to accept the offer.
- Once a shareholder has entered into an agreement to have its shares bought back, all rights attaching to the shares are suspended until the shares are transferred and cancelled. Where the agreement remains conditional upon certain events, these rights will be restored if the agreement is terminated.
- Immediately after registration of the transfer to the company of the shares bought back, the shares must be cancelled.
Given the present financial climate, many entities are using share buy-backs to re-arrange shareholder value. Challenger Financial Group announced in July 2008 a buy-back up to 10% of its issued share capital of 632 million shares. The group lost $2.8 billion in market value since last October, which reduced the value of its share price by more than two-thirds.
To restore shareholder value and reduce its debt, Challenger sold its financial planning businesses, Genesys Wealth Advisers and Synergy Capital to Axa Asia Pacific in June. They will use the $150 million in sale proceeds to fund the buy-back. The announcement of the buy-back caused a 5% jump in Challenger's share price, adding $70 million to the group's market capitalisation. But the ultimate impact of the buy-back on share price will depend on the size of the buy-back and the state of the market at the time.
Companies considering undertaking a buy-back offer should ensure that the Constitution does not prevent a buy-back. Where the company is listed, the timetable, lodgement and announcements procedures set out in the Listing Rules must be observed in addition to the provisions of the Corporations Act 2001(Cth). Finally, an entity that undertakes a buy-back must ensure that it does not constitute 'unacceptable circumstances' in the view of the Takeovers Panel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.