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What is a Share BuyBack?

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Through your journey as a business owner, you may need to consider share buybacks. Businesses can use share buybacks to repurchase their shares from shareholders to manage capital and optimise shareholder value. Navigating the legal landscape of share buybacks in New Zealand is vital due to the country’s distinctive corporate governance framework. This article delves into the intricacies of share buybacks, examining the process, eligible entities, and essential legal and practical factors.

Share Buybacks 

A share buyback is when a company offers to buy back some or all of its shares from shareholders. When shareholders accept this offer, their shares return to the company, which immediately cancels the shares. Doing so reduces the total number of remaining shares your company has available. Therefore, companies can return capital to shareholders and potentially improve earnings per share, signalling confidence in the company’s performance.

Who Can Perform a Share Buyback?

In New Zealand, share buybacks are primarily governed by the Companies Act 1993. This legislation prohibits companies from acquiring their own shares, though there are a few exceptions. There are provisions in the Companies Act that outline the procedures, restrictions and obligations companies must adhere to when conducting share buybacks. 

Companies cannot acquire their shares unless the following circumstances apply:

  • the company follows specific procedures set out in the Companies Act; 
  • they pass the solvency test involving whether the company can pay its debts as they become due in the normal course of business; and 
  • restrictions related to companies offering financial advice for purchasing their own shares. 

A company can buy back its shares if:

  • the buy-back does not significantly harm the company’s ability to pay creditors; and
  • the company follows specific procedures set out in the Companies Act. 
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Advantages of a Share Buyback

There are numerous advantages of utilising share buybacks, which include some of the following:

  • it can increase the earnings per share by distributing the same earnings among fewer remaining shares, indicating effective resource use and potentially fostering positive investor sentiment;
  • strategically executed share buybacks might directly boost shareholder value by reducing the number of shares available, potentially raising stock prices and benefiting your existing shareholders;
  • they are tax efficient (due to returning capital to your shareholders) compared to traditional dividends, providing more control over timing and returns from the buyback;  
  • buybacks offer more flexibility than dividends. While dividends follow a set schedule, buybacks can allow your company to determine when and how many shares they can repurchase. This flexibility accommodates changing financial landscapes and investment prospects; and
  • share buybacks offset dilution by reducing the number of outstanding shares, effectively increasing ownership percentage and earnings per share for existing shareholders. 

Types of Share Buy-Backs

If a company is buying back shares, you need to identify the type of buy-back you are undertaking. There are several types of share buy-backs which you should understand. 

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There are two common types of share buy-backs:

  • an equal access scheme; and
  • a selective buy-back.
Type of BuyBackDescription
Equal access schemeInvolves a company offering to repurchase an equal proportion of shares from each shareholder.
Selective buybackA company makes non-identical offers to shareholders to buy their shares.
Minimum holdingOnly applicable to listed companies, involving repurchasing unmarketable share parcels from shareholders.
Employee share schemeInvolves the company repurchasing shares held by employees or salaried directors of the company or a related company.
On market buybackOnly applicable to listed companies, where shares are repurchased via on-market trading on the stock exchange.

How to Prepare for a Share Buyback?

When preparing for a share buyback in New Zealand, you should prepare a disclosure document that complies with the Companies Act. You should share this document with each shareholder of your company. The offer should benefit the shareholders and the company and maintain fairness for their best interests.

You should keep in mind the following: 

  • uou may need to seek approval from your shareholders depending on the type and amount of shares you want to repurchase; 
  • any risk of insolvency that may arise from a share buyback; 
  • how dividends are taxed depending on company location; 
  • the tax status of your shareholders selling the shares back to the company. 

Additionally, your company will be subject to fringe benefit tax (FBT) on the dividend component of the share repurchase where that occurred on- or off-market. 

Key Takeaways

In summary, share buybacks are a strategic move for companies to manage capital and enhance shareholder value. The success of a share buyback is not absolute and hinges on the company’s surplus cash and potential undervaluation of shares, which can benefit shareholders. You need to focus on complying with the legal framework and regulations alongside governance principles for conducting these transactions effectively and ethically. By carefully navigating these regulations, you can execute share buybacks while maintaining transparency and meeting statutory obligations.

If you need assistance regarding share buybacks, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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