Share buy backs
Share buy-back provisions were simplified in 1995 to make share buy-backs more accessible to Australian companies by replacing mandatory procedures involving auditors, experts, advertisements and declarations with new safeguards for creditors and shareholders that focus on continuing company solvency, fairness to shareholders and disclosure of all relevant information.
The provisions recognise five basic types of share buy-backs: equal access, on-market, employee share scheme, selective buy-back and minimum holding (previously called 'odd lot'). Within those types, different rules also apply between share buy-backs involving 10% or less of the total shares to be purchased within a twelve-month period, and share buy-backs involving over 10%. This is sometimes called the 10/12 limit, and is laid down in s257B(4) and 257B(5) of the Corporations Act 2001 (the Corporations Act). The requirements for share buy-backs within the 10/12 limits are less onerous than those over that limit.
Equal access buy-backs
The most straightforward form of share buy-back is an equal access buy-back. All ordinary shareholders are offered a reasonable opportunity to consider the offer, which is to buy back the same percentage of their ordinary shares. An equal access scheme can include only marginal differences between offers, relating to, for example, differing accrued dividend entitlements or the calculation of odd lots.
If a proposed share buy-back is over the 10/12 limit, then it can only take place following passage of an ordinary resolution (passed with a simple majority vote of shareholders). A proposed share buy-back within the 10/12 limit does not require a resolution.
An equal access buy-back allows companies to devise their own timetable to suit their particular circumstances (within limits), if no shareholders are unfairly disadvantaged. The limits include:
a minimum of 14 days notice to shareholders and creditors must be given by lodging the buy-back documents with ASIC;
shareholders must receive a reasonable time to consider the buy-back offer; and
the buy-back must be commenced and completed within a reasonable time of the notice being lodged with ASIC (otherwise the notice would not serve a real purpose)
It is also important to note, when preparing a buy-back timetable,that the notice period for company meetings is - 21 days for unlisted (s249H), and 28 days for listed companies (s249HA). This may extend the time for lodgement of documents which must be lodged with ASIC before a meeting (e.g. s257C(3)), but it does not affect other time periods, such as the notice period under s257F(1) which gives a minimum time period of 14 days for notice. Clearly lodging documents under s257C(3) 28 or 21 days before a meeting would still satisfy the requirement of s257F(1).
In broad terms, a selective buy-back is one in which identical offers are not made to every shareholder, for example, if offers are made to only some of the shareholders in the company. The scheme must first be approved by all shareholders, or by a special resolution (requiring a 75% majority) of the members in which no vote is cast by selling shareholders or their associates. Selling shareholders may not vote in favour of a special resolution to approve a selective buy-back. The 10/12 limit does not apply to this type of buy-back.
The notice to shareholders convening the meeting to vote on a selective buy-back must include a statement setting out all material information that is relevant to the proposal, although it is not necessary for the company to provide information already disclosed to the shareholders, if that would be unreasonable.
Other types of buy-backs
A company may also buy back shares held by or for employees or salaried directors of the company or a related company. This type of buy-back, referred to as an employee share scheme buy-back, requires an ordinary resolution if over the 10/12 limit.
A listed company may also buy back its shares in on-market trading on the stock exchange, following the passing of an ordinary resolution if over the 10/12 limit. The stock exchange’s rules apply to on-market buy-backs.
A listed company may also buy unmarketable parcels of shares from shareholders (called a minimum holding buy-back). This does not require a resolution but the purchased shares must still be cancelled.
Forms and lodgement requirements
Wherever shareholder approval of the buy-back is required, copies of the notices and related material must be lodged with ASIC for inclusion on its public register, prior to being sent to shareholders. This allows creditors adequate information on buy-backs which may affect the creditworthiness of the company. It is important to ensure that the forms are fully completed.
Form 281 is also to be lodged with ASIC at least 14 days before the buy-back in the case of a buy-back (other than a minimum holding buy-back) which does not require lodgement of the buy-back documents, for example, an employee share buy-back or an on market buy-back either of which is under the 10/12 limit. The table below also sets out when different forms are lodged.
It is necessary to notify ASIC of the cancellation of the shares in respect to all types of share buy-backs, Form 484 Change to company details.
Summary of buy-back procedures
Section 257B of the Corporations Act provides, in a form similar to the table below, a summary of the procedures involved in various types of share buy-back.
Note: A Form 281 is used, as well as a Form 280, in the case of a employee share scheme over the 10/12 limit, an on market buy-back over the 10/12 limit, an equal access scheme or a selective buy-back only if:
- the company intends to give short (less than 14 days) notice of a meeting to approve the buy back and lodge the notice of meeting (with a Form 280) less than 14 days before the relevant date; and
- in the case of an equal access or a selective buy back, if the company lodges the documents referred to in s257E less than 14 days before the relevant date.
- 'relevant date' means:
- if the buy-back agreement is conditional on the passing of a resolution, the date the resolution is passed; or
- if it is not - the date the agreement is entered into (s257F).
It is the responsibility of the director/s to ensure that a share buy-back does not cause the company to become insolvent. If it does, the director/s may be personally liable for the loss. Further, if a share buy-back causes the company to become insolvent, the liquidator may be able to recover compensation from the selling shareholders.
This is Information Sheet 69 (INFO 69). Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.