If a shareholder wants to leave a company and dispose of their shares, a Selective Share Buy-Back can be a strategic tool available to the remaining shareholders.
What is a Selective Share Buy-Back?
There are times when one or more shareholders in a private company wish to leave and dispose of their shares. This can be done in a number of ways, one of which is a selective share buy-back. This is perhaps most appropriate if a shareholder wishes to leave and the departure is not opposed by the remaining shareholders, and the remaining shareholders do not have the financial resources to pay the departing shareholder a fair price. In those circumstance, it may be that the company itself has sufficient resources to payout the departing shareholder.
Sometimes, some (but not all) of the remaining shareholders may have the financial resources to purchase the leaving shareholder's shares for a fair price. However, to the remaining shareholders as a group it is more important to retain relativities of their current shareholdings. As such, when a shareholder wishes to leave a company, it will be important that the remaining shareholders consider a way to prevent a change in the relative shareholdings. This may be done by way of a selective share buy-back.
As suggested by its name, a selective buy-back is a form of buy-back where a company buys back shares only from particular shareholders. In other words, it is a selective share buy-back of the shares of a company's shareholder who wishes to cash in his or her shares and to use the cash in other investments.
It is imperative that the price of the shares which are being bought back by the company is fair and reasonable. Depending on the nature of the assets and liabilities of the company, a professional valuation may be required.
What are the requirements for a Selective Share Buy-Back?
Buy-backs are regulated by ASIC. Under section 257A of the Corporations Act 2001 (Cth) (the Act), companies may carry out a buy-back of its own shares if:
- the buy-back does not materially prejudice the company's ability to pay its creditors; and
- the company follows the procedures as laid down in the Act.1
Buy-backs are procedural heavy and compliance with the process as set out in the Act must be strictly adhered to. For instance, the precise terms of the offer to buy back the shares must be submitted to ASIC for its oversight. It appears that ASIC only raises questions in only a small minority of cases.
Recently, Madgwicks advised and assisted with a successful share buy-back of a family owned company .
All the shareholders are also members of one family. However, fluctuating family dynamics may sometimes result in negative outcomes in the management of the business including the shareholdings. The Madgwicks team tactfully navigated legislation, ASIC requirements and family dynamics to successfully carry out a buy-back of one of the shareholder's shares.
Despite the strict legislative requirements, a selective share buy-back should always be considered as part of the suite of strategies when it is time for one or more shareholders to move on.
1 Corporations Act 2001 (Cth) s 257A.
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