[fusion_builder_container type=”flex” hundred_percent=”no” equal_height_columns=”no” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” parallax_speed=”0.3″ video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” border_style=”solid” padding_left=”0px” padding_right=”1px”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ align_self=”auto” content_layout=”column” align_content=”flex-start” valign_content=”flex-start” content_wrap=”wrap” spacing=”yes” center_content=”no” column_tag=”div” target=”_self” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” order_medium=”0″ order_small=”0″ margin_top=”0px” margin_bottom=”0px” hover_type=”none” border_style=”solid” box_shadow=”no” box_shadow_blur=”0″ box_shadow_spread=”0″ z_index_subgroup=”regular” background_type=”single” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ lazy_load=”avada” background_position=”left top” background_repeat=”no-repeat” background_blend_mode=”overlay” sticky=”off” sticky_devices=”small-visibility,medium-visibility,large-visibility” absolute=”off” filter_type=”regular” filter_hover_element=”self” filter_hue=”0″ filter_saturation=”100″ filter_brightness=”100″ filter_contrast=”100″ filter_invert=”0″ filter_sepia=”0″ filter_opacity=”100″ filter_blur=”0″ filter_hue_hover=”0″ filter_saturation_hover=”100″ filter_brightness_hover=”100″ filter_contrast_hover=”100″ filter_invert_hover=”0″ filter_sepia_hover=”0″ filter_opacity_hover=”100″ filter_blur_hover=”0″ transform_type=”regular” transform_hover_element=”self” transform_scale_x=”1″ transform_scale_y=”1″ transform_translate_x=”0″ transform_translate_y=”0″ transform_rotate=”0″ transform_skew_x=”0″ transform_skew_y=”0″ transform_scale_x_hover=”1″ transform_scale_y_hover=”1″ transform_translate_x_hover=”0″ transform_translate_y_hover=”0″ transform_rotate_hover=”0″ transform_skew_x_hover=”0″ transform_skew_y_hover=”0″ transition_duration=”300″ transition_easing=”ease” animation_direction=”left” animation_speed=”0.3″ animation_delay=”0″ last=”true” border_position=”all” first=”true”][fusion_text content_alignment=”justify” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” animation_direction=”left” animation_speed=”0.3″ animation_delay=”0″]
How to increase shareholder value in one easy step – Share Buy Backs Explained
ASX listed companies have spent more than $36 billion on Share Buy Backs over the last three years, with major banks dominating that statistic. Iconics like Qantas have also featured, spending over $1 billion on buying back its shares since 2021.[1] On a global scale, In May of 2024, Apple announced it will buy back approximately US$110 billion of its shares to reverse dilution and increase the value of its shares.[2]
What is a Share Buy Back?
A Share Buy Back is the process whereby a company purchases its own shares from existing shareholders and then cancels those shares. Any private or public company can buy back its own shares. Share Buy Backs can only be undertaken if certain preconditions are met, such as notices being given to ASIC at least 14 days prior to undertaking the Share Buy Back and potentially requiring a 50% or 75% shareholder vote (depending on the type of Share Buy Back).
Share Buy Backs are not compulsory, so a shareholder can elect whether to take up the buy back. This ensures the price to be paid by the company per share is at least if not more than market value. Usually up to 30% more.
Why do a Share Buy Back instead of just Paying a Dividend?
Some good reasons for undertaking a Share Buy Back are:
- increasing earnings per share (EPS) – by reducing the number of outstanding shares, the company’s earnings are spread across fewer shares, leading to a higher EPS. This can make the company more profitable (per share) and attractive to investors;
- returning surplus cash that does not have a specific purpose and likely will not be invested to produce a return greater than the cost of capital, to shareholders;
- to restructure its share capital, e.g., to eliminate or reduce a class of shares;
- to shift control of the company, which can be achieved using a selective Share Buy Back (but see below); and
- as an exit route for shareholders, for example:
- for a private (“Pty Ltd”) company, a selective Share Buy Back may be the most efficient way for a consenting shareholder to exit or “retire” his/her shareholding; and/or
- where an employee or salaried director who holds shares is leaving the company, those shares can be bought back under an employee share scheme buy back.
The Modigliani – Miller Propositions
Further insight into the purposes of Share Buy Backs is provided by the Modigliani – Miller Propositions (M&M Propositions), economic propositions set out a formulaic basis for why Share Buy Backs are a sensible undertaking for a company (a detailed explanation of the M&M Propositions can be accessed at https://www.investopedia.com/terms/m/modigliani-millertheorem.asp).
In layman’s terms, the M&M Propositions neatly set out that the capital structure of a company is the combination of debt (leverage) and equity. Investors tend to demand a higher return to be compensated for additional risk/debt/leverage. Increasing debt to purchase a company’s own shares leverages the company’s debt to increase the company’s value and provide a higher return to shareholders. Therefore, a company purchasing its own shares at a higher return rate than the debt incurred to obtain those shares (including tax benefits) provides a greater return to shareholders and increases company value.
Types of Share Buy Backs
The Corporations Act 2001 (Cth) (Act) recognises several types of Share Buy Backs, each with its own distinct uses, benefits and requirements.
Equal Access (non-selective) Buybacks are the most common type of buyback, where the company makes an offer to all ordinary shareholders to buy back a percentage of all shares at a set price. This ensures fairness and equal opportunity for all shareholders and therefore only requires the approval of 50% of shareholders. While the offer must be substantially the same for all shareholders, some variations are permitted, such as different arrangements for small holdings or adjustments for dividend entitlements.
A subsection of Equal Assess Buybacks is where the company buys back less than 10% of its shares during any 12-months period (10/12 Buybacks). 10/12 Buybacks still require 14 days’ prior notice to ASIC, but the Act does not require any shareholder approval (so the Directors can instigate a 10/12 Buyback on their own decision).
Selective Buybacks involve the company buying back shares from specific shareholders only. This type of Share Buy Back requires 75% majority approval of shareholders, with no votes being cast by any shareholder whose shares are proposed to be bought back, in favour of the resolution. This higher threshold is in place to protect minority shareholders.
Procedural Steps
Procedural requirements for a Share Buy Back vary depending on the type of buyback. However, broadly speaking the key procedural elements of any Share Buy Back are:
- giving ASIC 14 days’ notice of an intention to carry out a buyback;
- obtaining shareholder approval and lodging company General Meeting documentation with ASIC in advance of the meeting to approve the buyback;
- making certain disclosures, including preparing offer documents, which must also be lodged with ASIC;
- entering Share Buy Back Agreements with those shareholders who take up the buyback offer; and
- cancelling the shares bought back and notifying ASIC of the cancellation.
A company’s constitution may also contain specific provisions relating to buybacks. For example, the constitution may:
- require a higher percentage of shareholder approval for certain types of buybacks;
- set out specific procedures for conducting buybacks;
- include a right of first refusal to all shareholders whereby they may elect to buy any shares offered to the company for buy back; and
- restrict the company’s ability to conduct buybacks in certain circumstances.
Does your Share Buy Back pass Muster?
ASIC and the Takeovers Panel ASIC may prohibit your Share Buy Back if the Share Buy Back may expose some shareholders, company creditors or the public to unacceptable risk or liability.
The Australian Takeovers Panel (a tribunal with the power to make legally binding orders on companies, its Directors and Shareholders and was set up to review takeovers and other types of major share creation, transfer or cancellation) is available on application of a disgruntled party to review any Share Buy Back before or shortly after it was effected.
The Takeovers Panel will cancel a Share Buy Back if the Panel considers the Share Buy Back involves “unacceptable circumstances”. This term is meant to be wide and undefined, so that the Panel is not restricted from making cancellation orders wherever it considers the company or shareholder actions are unreasonable.
However, essentially the Takeovers Panel may cancel a Share Buy Back or make other overriding orders if it perceives any of the following are “unreasonable” in all circumstances:
- ASIC v Adler (2002): Where the company directors are perceived to have not acted in good faith and in the best interests of the company.
- Re FAI Insurances Ltd (1999): Where it can reasonably be inferred that some shareholders are treated in an unfair way in comparison to all shareholders.
- Village Roadshow v Boswell (2004) VSCA 16: Where procedural matters such as voting rights have not been applied properly.
- Village Roadshow No. 2 (2004): Where it was questioned as to whether the company has made full disclosure to all shareholders and how that is achieved
- Village Roadshow No. 3 (2004): Where the Share Buy Back may result in a change in 50% or 75% voting rights in a manner if that is not reasonable.
Criticisms
Among the most common criticisms of Share Buy Backs are that they slow companies from reinvesting into daily operations and enable companies to rely on a method of increasing shareholder value that may not eventuate. For example, any subsequent drop in the repurchasing Company’s share price could erase the potential cash coup scored by investors had there instead been a dividend.
They also generate little tax revenue for investors personally. Instead, the company receives the tax benefits applied to the repurchase.
Conclusion
Share Buy Backs are a very useful tool for companies to have, on the proviso the company undertakes it for the proper reasons and can achieve the buyback efficiently and without triggering any of the concerns of the Takeovers Panel.
Salerno Law has experts in Share Buy Backs for both listed and proprietary companies, please contact our office should you or your company need legal advice on conducting a Share Buy Back.
Author Darren Fooks & Christopher Horn
[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]