Share buy backs in a company

In Australia, a private company share buyback allows a company to purchase its own shares from shareholders, leading to a shareholder exit or a reduction in the company’s issued share capital.

• A share buyback occurs when a company offers to purchase its own shares from existing shareholders, who then sell their shares back to the company.
• The company cancels the shares it buys back, reducing the total number of shares on issue.
• This can lead to an increase in the ownership percentage of remaining shareholders.
• Share buybacks can be used as an alternative to selling shares to other parties.

• Equal Access Scheme: The buyback is open to all shareholders on the same terms.
• Selective Buyback: The buyback is offered to only a select shareholder or group of shareholders.

Company Decision: The company decides to initiate a share buyback (being entitled to do so under its constitution or the shareholders agreement).

• Board Approval: The company’s board of directors approves the buyback.
• Shareholder Approval: Depending on the type of buyback and the company’s constitution, shareholder approval may be required.
• ASIC Notification: The company must lodge a notification with the Australian Securities and Investments Commission (ASIC).
  o Form 280: Notification of share buy-back details.
  o Form 281: Notice of intention to carry out a share buy-back.
• Buyback Agreement: A share buyback agreement is entered into between the company and the shareholder(s).
• Share Cancellation: Once the buyback is completed, the company cancels the shares it
  has purchased.

• The Corporations Act 2001 (Cth) regulates share buybacks which has specific requirements, including notice periods and shareholder approval process.
• A company cannot buy back its own shares unless it is permitted to do so under the Corporations Act.
• A company must have sufficient funds to settle the buyback.
• The company’s constitution must allow for share buybacks.
• 10/12 Limit: A company cannot buy back more than 10% of its shares in any 12-month period, unless it is a selective buyback.

• The proceeds from a share buyback are split into a dividend component and a capital component dependent on the way the company accounts for the transaction.
• Share buybacks can have tax implications for both the company and the shareholders.
• It’s advisable to seek professional tax advice before proceeding with a share buyback.

Shareholder Exit:
A share buyback can be used as a way for a shareholder to exit the company.

Capital Management:
Buybacks can be used to reduce the company’s share capital.

Increase Earnings Per Share:
By reducing the number of shares on issue, buybacks can increase earnings per share.

Improve Shareholder Value:
Buybacks can signal to the market that the company’s shares are undervalued.

• Share buybacks are a complex process and should not be undertaken lightly.
• Companies should seek professional legal, tax, and financial advice before proceeding with a share buyback.
• The company must ensure that it complies with all laws and regulation

A sale of shares by a departing shareholder to the continuing shareholders is assumed to be the best option but the other option is buy-back of shares by the Company.

When selling to another shareholder/s the ownership percentage of the continuing shareholders is increasing. So assuming the shares are on capital account, the departing shareholder would make a capital gain (to the extent their capital proceeds exceed their cost base) in the shares.

Conversely, where the capital proceeds are less than the reduced cost base, a capital loss will be made. Concessions such as the 50% general discount and the small business CGT concessions may apply to reduce the assessable amount of the capital gains.

An alternative to a share sale is for a share buy-back where the company buys back its own shares from existing shareholders and immediately cancels the shares. This means that the number of shares on issue for the company is reduced and the ownership percentage of the existing shareholders increases accordingly.

This option can provide tax savings to the Company and the exiting shareholder and funding the transaction from the company rather than the continuing shareholders may be a benefit as well as allowing for the use of excess franking credits in the company. A share buy-back provides a useful way to unlock the value of the credits.

If the company itself will lend the acquiring entity funds to purchase the shares it can lead to Division 7A and Corporations Act issues. However, under a buy-back, the company uses its own resources to fund the purchase so there is no Division 7A issue. Depending on the State, transfer duty may apply on the transfer of shares so a share buy-back may avoid duty.

If for example a company car is also transferred to the exiting shareholder or other company asset you can offset the value of these assets against some of the price paid for the share buybacks. Doing this under a regular share sale could trigger Division 7A issues.

Unlike a traditional share sale, the proceeds received under a share buy-back are split between two components – capital component and the dividend component. For most private companies with limited paid-up capital (e.g., $2), the capital component of a share buy-back will generally be minimal which means most of the proceeds will be represented by a dividend (which may be franked).

While the share buy-back may be an attractive option other factors to consider include for example the marginal tax rate of the exiting shareholders, the existing shareholders available revenue or capital losses, availability of franking credits in the company, CGT issues and more. The key is to get proper expert advice before going down either track so everyone involved understands the pros and cons and tax outcomes.

In Australia, the “whitewash procedure” under the Corporations Act 2001 (Cth) allows a company to provide financial assistance to a person acquiring shares, but only if shareholders approve it (under section 260B) and it doesn’t materially prejudice the company or its shareholders.

Section 260A(1)(a) of the Corporations Act 2001 (Cth) generally prohibits companies from providing financial assistance to an existing or proposed shareholder for acquiring shares in itself or its holding entities.

There are, however, exceptions to this general rule, which include:

a. That giving of the financial assistance would not materially prejudice the:
i. interests of the company or its shareholders; or
ii. the company’s ability to pay its creditors; or
b. the financial assistance falls in an exemption under section 260C of the Act (for example, the company is providing a lien on partly-paid shares, or the company is a bank providing a loan in its ordinary course of business); or
c. the company’s shareholders approve the assistance (known as whitewashing).

The High Court case of Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33 illustrates the dangers in forming a view that the proposed financial assistance would not materially prejudice the relevant persons. The Court took a very broad view of what it means to “acquire shares” and the type of financial assistance captured by section 260A of the Act, including paying a dividend by means other than by payment of cash, granting security, agreeing to pay consultancy fees and costs incurred by a company to enforce pre-emptive share sale provisions under a Shareholders Agreement.

Even though a breach of the financial assistance provisions will not invalidate the transaction, it will expose the officeholders of the company and parties involved in the transaction (including financiers) to potential penalties, including criminal penalties where the breach is dishonest.

An effective way to avoid breaching section 260A is to seek shareholder approval under section 260B of the Corporations Act.

The process can also delay a transaction so you need to consider these obligations and factor the process and notice requirements into the sales process.

It is complicated! that’s why you need expert legal and financial and taxation advice before embarking on these transactions.

CONTACT:
Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist
robert@sanickilawyers.com.au | Mobile: 0412 673 757