Although companies traditionally cannot buy their own shares, many people don’t realise that the Corporations Act 2001 (Cth) provides a procedure to do so, according to commercial lawyer and partner, TERRY MORGAN.
Historically, the law prevented a company from, “buying its own shares”. That is, Company A was not able to use its own funds to buy back shares that Company A had issued to Shareholders. This law was imposed upon the premise that if Company A was able to use its own funds to repurchase its own shares, then there would be an overall reduction in the capital of Company A; this could have an adverse impact on Shareholders and creditors of the company.
However, the Corporations Act 2001 (Cth) recognises that there may be circumstances in which it is appropriate for a company be able to acquire shares in itself. For example:
- where shares which have been issued are superfluous to the needs of the company and the members; or
- where it is appropriate to have the company acquire such shares rather than such shares being acquired by other Shareholders or other entities.
The sections of the Corporations Act 2001 (Cth) that enable a company to acquire its own shares require strict compliance with the relevant provisions. They include notification to the Australian Securities Investments Commission and resolutions being passed approving the acquisition by a company of its own shares.
Any purchase by a company of its own shares, which is referred to as a “buy-back”, is also subject to requirements that such a buy-back does not materially prejudice the company’s ability to pay its creditors.
It is necessary to ensure, when considering whether, a “buy-back” is possible that:
- the provisions of the Corporations Act 2001 (Cth) will be complied with; and
- any such action does not materially prejudice the ability of the company to pay its creditors.
When considering a “buy-back” of shares, it is also necessary to consider the effect of any “buy-back” upon the rights of the Shareholders of the shares being acquired by the company. There may also be capital gains tax consequences for the Shareholder whose shares are being acquired.
