Companies may decide to buy back shares they have already issued.
There are different types of share buy-backs, with different rules. These depend on how many shares a company wants to buy back over a 12-month period.
Some types of share buy-back need to be approved by shareholders.
Types of share buy-back
A share buy-back is when a company buys back shares they issued to members (shareholders). There are different types of buy-back with different rules. These include equal access buy-backs and selective buy-backs.
Stricter rules apply if a company wants to buy back more than 10% of its shares within 12 months. This is sometimes called the ‘10/12 limit’.
An equal access buy-back is the simplest way for a company to buy back its shares. Under an equal access buy-back, the company offers to buy back the same percentage of ordinary shares from all its members. All the members have a reasonable opportunity to consider the offer. There may be small differences in the offers, such as in dividend entitlements or how small numbers of shares are calculated.
A proposed buy-back within the 10/12 limit does not need a resolution. The company will need to lodge with ASIC a notice that the company intends to carry out the buy-back and the offer documents at least 14 days before a buy-back agreement is entered into.
If the proposed buy-back is over the 10/12 limit, the company must pass an ordinary resolution.
First, the company will need to call a meeting of members. The minimum notice period for company meetings is 21 days for unlisted companies and 28 days for listed companies.
Then, the company must lodge the notice of meeting with buy-back documents and the offer documents with ASIC at least 14 days before the resolution is passed.
A selective buy-back is when a company offers to buy back shares from only some shareholders. Because not all shareholders are treated the same, this type of buy-back needs special approval.
To have a selective buy-back, there are two possibilities:
All shareholders agree, OR
At least 75% of shareholders vote in favour in a special resolution, but the shareholders who are selling their shares are not allowed to vote. These shareholders’ associates are also not allowed to vote.
The 10/12 limit does not apply to selective buy-backs.
Before the vote, the company must send all shareholders a notice that includes all important information about the proposal. It does not have to include information that shareholders already know, if it would be unreasonable to do so.
An employee share scheme buy-back is when a company buys back shares that are held by employees or salaried directors as part of an employee share scheme. This allows employees or directors to sell their shares back to the company.
If the buy-back exceeds the 10/12 limit, shareholders must approve it with an ordinary resolution.
An on-market buy-back occurs when a listed company buys its own shares directly through the securities exchange in the normal course of trading. These buy-backs are done at the current market price and follow the rules of the securities exchange. On-market buy-backs that exceed the 10/12 limit need shareholder approval through an ordinary resolution.
A minimum-holding buy-back allows a listed company to buy back shareholdings that are less than marketable parcel from shareholders. This is also known as an ‘unmarketable parcel’ buy-back. Shareholders do not need to approve this type of buy-back. All shares bought back must be cancelled.
Solvency after buy-backs
Company directors must make sure their company does not trade while insolvent. This means directors must ensure that a share buy-back does not cause the company to become insolvent. If this happens, they may be personally liable for the loss. If a share buy-back does cause insolvency, the liquidator may be able to recover compensation from the selling shareholders.
Tell ASIC about share buy-backs
If a company needs shareholders to approve the buy-back, it must tell us.
The company must lodge all notices and related documents with ASIC before it sends them to shareholders. This information will go on the public register, so that creditors and others can see important information about the buy-back that could affect the company’s financial situation. ASIC must be told at least 14 days before a resolution is passed or a buy-back agreement is entered into. Use this form:
If the company wants fewer than 14 days’ between lodging Form 280 and making the agreement or getting approval, the company must also lodge Form 281 with ASIC.
The company also needs to lodge Form 281 to notify ASIC of share scheme buy-backs and on-market buy-backs that are within the 10/12 limit (other than minimum holding buy-backs).
