A share buy-back, also commonly referred to as a share repurchase, is a process whereby a company buys back its own shares from its shareholders, whether by agreement or by virtue of a scheme of arrangement as contemplated in terms of the Companies Act No. 71 of 2008 (“2008 Companies Act”) (“Share Buy-Backs”) – a scheme of arrangement arises in situations where a company, upon the approval by its shareholders in terms of a special resolution, repurchases a class of shares.
Share Buy-Backs have a long and convoluted history in terms of South African law, and South African courts have previously held that it provides companies with the power to manipulate the market or to abuse share repurchases to the detriment of creditors. Notwithstanding this, there are potentially many commercial and financial benefits associated with Share Buy-Backs and it has become an attractive commercial tool to enhance various commercial transactions.
This article will briefly explore the history of Share Buy-Backs as well as the benefits of Share Buy-Backs.
History of Share Buy-Backs:
Until as recently as 1999, a company incorporated in South Africa was not allowed to repurchase its own shares. The rationale behind this prohibition was to protect creditors of a company by obliging a company to retain its capital and to refrain from returning such capital to the shareholders (“Capital Maintenance Concept”). Further reasons for such prohibition were set out in the decision of the House of Lords in Trevor v Whitworth  12 App Cas 409 (applied in South African law by the case of Cohen v Segal 1970 (3) SA 702 (W) (“Cowen v Segal”)), where the court, amongst other things, found that a company cannot repurchase its own shares as: a company cannot be a member of itself; such a repurchase would amount to an unlawful reduction of share capital; and it would allow a company to influence the price of its own shares in the market.
In 1999, South Africa departed from the principles set forth in Cowen v Segal as well as the Capital Maintenance Concept and adopted the share repurchase provisions prevailing in the United States of America, Canada and the United Kingdom. At present, in terms of the 2008 Companies Act, a company may repurchase its own shares subject to the solvency and liquidity test being passed (which ensures protection for creditors of a company) and subject to such shares which are acquired obtaining the status of cancelled shares.
Benefits of Share Buy-Backs:
There are various benefits which may be associated with a company entering into a Share Buy-Back, some of these include the following:
- it may enable a company to buy out a disgruntled shareholder;
- the share repurchase power gives marketability to the shares of a private company since:
- the company could repurchase the shares of a selling shareholder where the other shareholders do not have the funds to do so; and
- the individual or entity subscribing for shares in the company may prefer the option of re-selling the shares to the company in the future.
- a share repurchase right is useful in relation to employee share schemes, as it enables a company to repurchase the shares which were granted to employees upon the retirement of such employees or upon the termination of their employment with the company;
- if the redeemable shares are quoted at or trading below the redemption price, it provides the company with a financial benefit by buying back the shares in advance of the redemption date;
- some companies have used share repurchases to ‘gear up’ by reducing equity, so as to achieve a more favourable debt–equity ratio;
- by means of a share repurchase, cash-rich companies with surplus cash would be able to return such cash to their shareholders, who are then able to make more favourable individual investments elsewhere with that capital; and
- a company may wish to re-organise its classes of shares and may desire to cancel an entire class of shares during such re-organisation.
Share Buy-Backs may present numerous commercial and financial benefits to companies, whether the Share Buy-Backs are facilitated by way of an agreement or by virtue of a scheme of arrangement as contemplated in terms of the 2008 Companies Act. The suitability of a Share Buy-Back arrangement will however depend on the goals and objectives of the company concerned.
VDMA’s team of experts are available to assist you and your business with any Share Buy-Back agreements, establishing a scheme of arrangement in terms of the 2008 Companies Act, as well as any associated and applicable Takeover Regulation Panel requirements.
Published 26 July 2022