Trend: Share buy backs

US Companies have been buying their own shares at the fastest rate since the financial crisis - $338.3 billion of stock was bought back in the first half of 2014, the most for any six-month period since 2007.[1] Companies like Apple, IBM, and Exxon Mobil are leading the charge. These large returns of cash to shareholders have played a big role in the market’s record-breaking rally.

In Australia, whilst buybacks haven’t quite reached the same level of popularity as on Wall Street, a trend is developing where an increasing number of Australian companies are employing share buyback schemes as a means to distribute excess capital. Two weeks ago Nine Entertainment Co Holdings announced a $150 million share buy-back.[2] Nine followed in the steps of other companies such as Rio Tinto, Fairfax Media, Orica, Amcor and Seven Group, who had all recently announced upcoming share buy backs. Why do companies repurchase their own shares? There are several incentives for a company to repurchase their shares. The main incentives are as follows:

  • A share buy back is a means of distributing existing capital;

  • It increases the value of shares as the number of shares has been reduced, driving their value up;

  • It may benefit shareholders as decreasing the total number of outstanding shares increases the percentage of share ownership held by each investor;

  • A share buy-back is sometimes considered to be an indication that a company has a favourable attitude towards its shareholders as it returns the excess capital to the shareholder rather than investing it elsewhere;

  • A share buy-back can improve the company’s financial ratios; specifically its return on equity and earnings per share figures, even if overall profit has not increased. Both ratios have as their denominator the number of shares and by reducing number of shares, you increase the ratio;

  • A share buy-back may demonstrate to the market that the company feels that its shares are undervalued, which signals that the company has confidence in its future.

How does a company buy back its shares? Firstly it is important to understand that the Corporations Act prohibits a company from holding shares in itself.[3] However, certain buy-backs of shares can occur if the buy-back does not materially prejudice the ability of the company to pay its creditors and as long as the company follows its legal requirements.[4] Essentially, a share buy-back involves the company repurchasing its shares from its shareholders. The repurchased shares are cancelled by the company, and the number of outstanding shares decreases. As a result, the relative ownership stake of each investor increases because there are fewer shares on the earnings of the company.[5] What are the types of share buy-back schemes? Equal Access buy-back In an equal access buy-back, the offer is made to every person who holds ordinary shares in the company to buy back the same percentage of ordinary shares from each person. The terms of all the offers are the same. All of those persons must be given a reasonable opportunity to accept the offer, and the buy-back agreement must not be entered into until a specified time for the acceptance of offers has closed.[6] A minimum of 14 days notice to shareholders and creditors must be given by lodging the buy-back documents with ASIC.[7] If the buy-back is only for 10% of the smallest number, at any time during the last 12 months, of votes attaching to voting shares of the company, [8] no shareholder approval is required. If this 10/12 limit is exceeded, then shareholder approval must be sought through an ordinary resolution. Selective buy-back A selective buy-back differs from an equal access buy-back, in that identical offers are not made to every shareholder. The scheme must first be approved by all shareholders, or by a special resolution (requiring a 75% majority) of the members. 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. Employee buy-back An employee buy-back is where a company buys back shares held by or for employees or salaried directors of the company or a related company.[9] In order for the scheme to be eligible, it must have been approved by the company by resolution. On Market buy-back An on market buy back are one of the following:

  • An offer made by a listed corporation at an official meeting on a prescribed financial market in the ordinary course of trading on that market; [10] or

  • An offer made in the “ordinary course of trading” in a financial market outside Australia which ASIC declares in writing to be an approved overseas financial market. A buy-back by a listed company is an on-market buy-back under this subsection only if an offer to buy-back those shares is also made on a prescribed financial market at the same time[11].

The ASX Listing Rules stipulates further procedures that must be followed for this type of buy-back. Minimum Holding buy-back A minimum holding buy-back is the buy-back of shares in a listed corporation where the parcel of shares bought-back is less than a “marketable parcel”.[12] This does not require a resolution but the purchased shares must still be cancelled. How can we help you? If your company is interested in issuing a share buy-back, we can guide you through the regulatory requirements and assist you in carrying out a share buy-back scheme which suits your needs.

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