Company share buyback
In a depressed market wherein companies are encountering liquidity challenges to fund operations or investments, an often overlooked provision of the Companies and Other Business Entities Act [Chapter 24:13] is the option to initiate a share buy back of issued shares.
In terms of section 128 of Companies and other entities Act, a company is allowed at law to trigger a share buy-back where the company buys some of its own shares back from the investors or shareholders. The shares will then either be cancelled or held in treasury until the directors decide to reintroduce them back on the market.
The process of buying back shares from shareholders can be done in three ways – market, proportional and tender buyback.
Market buyback shares are bought in the open market from the current sellers while in the case of
Proportional buyback, shares are bought from each shareholder in a set proportion to each holding.
Tender buyback, shares are bought by tender from some selected investors/shareholders. The net effect of the share buyback scheme is to effectively reduce the number of shares available on the market.
The rationale
Generally, the purpose of a share buyback should be to effectively increase the net asset per share/earnings per share and will be achieved by using up surplus cash or increasing debt. Thus, the option is usually recommended by directors after considering alternative investment opportunities as well as other financial considerations.
Although the share prices are market-dependent and not directly influenced by directors, the share buyback may be done mainly for the purpose of raising the share price (or reducing the trading discount).
Legal considerations
The issue of share buyback is a complex one that can be done only upon approval and consent by the shareholders. Due to the fact that there are some legal attachments that accompany the process, the decision to embark on a buyback is not fully bestowed on the discretion of the directors only.
The request to take on a share buyback usually takes a standard form, with specifications on the limits for the number of shares not to exceed, for example, 10% of the issued shares, the minimum price not less than the nominal price of the share and the maximum price not exceeding 5% and the middle market price for the shares for the five business days immediately preceding the day of purchase (as required by the stock exchange listing rules).
The companies and other entities act sets requirements that ought to be satisfied for a share buy back arrangement to sail through without encountering impediments.
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at fungai@zenaslegalpractice.com and WhatsApp 0772 997 889. Theophilus Mubemi is a is a Legal Intern, email address is theomubemi@gmail.com, 0717936310
