Articles and Publications
Share Buy-backs
02/Mar/2006
Share buy-backs by companies have become an increasingly common way of facilitating a retirement or other exit by a shareholder.
Company Law was modified in 1985 to make it possible for companies to purchase their own shares.
The rules often cause confusion because they are part of a technical area of law relating to maintenance of capital by companies.Share buy-backs are also often confused with the redemption of redeemable shares or with the provisions for reduction of share capital which have to be sanctioned by the Courts.
Share buy-backs are ideally suited to a situation where a minority shareholder needs to realise their investment for whatever reason.The key requirements are that the company must have sufficient distributable reserves (unless the more complex purchase out of capital rules are followed) and that a special resolution of shareholders is passed approving the purchase prior to it happening.Subject to meeting certain conditions the buy-back will be taxed as a capital transaction rather than being subject to income tax.
From a practical point of view it is important that the company has sufficient cash because a buy-back must be paid for on the day and not on deferred terms.The shares bought back reduce the issued share capital of the company, but remain part of the authorised share capital. They cannot be re-issued.
The net effect on the other shareholders is that their percentage holdings in the company will increase. The fact that the purchase is made by the company also means that the other individual shareholders do not have to find the cash to buy the selling shareholder's shares themselves.
Company Law was modified in 1985 to make it possible for companies to purchase their own shares.
The rules often cause confusion because they are part of a technical area of law relating to maintenance of capital by companies.Share buy-backs are also often confused with the redemption of redeemable shares or with the provisions for reduction of share capital which have to be sanctioned by the Courts.
Share buy-backs are ideally suited to a situation where a minority shareholder needs to realise their investment for whatever reason.The key requirements are that the company must have sufficient distributable reserves (unless the more complex purchase out of capital rules are followed) and that a special resolution of shareholders is passed approving the purchase prior to it happening.Subject to meeting certain conditions the buy-back will be taxed as a capital transaction rather than being subject to income tax.
From a practical point of view it is important that the company has sufficient cash because a buy-back must be paid for on the day and not on deferred terms.The shares bought back reduce the issued share capital of the company, but remain part of the authorised share capital. They cannot be re-issued.
The net effect on the other shareholders is that their percentage holdings in the company will increase. The fact that the purchase is made by the company also means that the other individual shareholders do not have to find the cash to buy the selling shareholder's shares themselves.
