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6 July 2022

The Low-Down on Company Share Buybacks

Are you a shareholder of a company looking to sell your shares and you don’t know what to do next? If so, you may find it useful to keep reading. You will be happy to know that there are a few sale options available to you.

Let’s take a look at some of those options:

  • sell your shares to other shareholders of the company;
  • sell your shares to a third party outside of the existing shareholders of the company; or
  • sell your shares back to the company itself.

Just bear in mind that when you are selling your shares to another shareholder of the company or to a third party outside of the company, the Shareholders Agreement will govern the circumstances in which you are allowed to do so. However in this article, we are specifically focusing on company share buybacks today: what a company share buyback is and what it entails.

Company shares buyback, what is this?

A company share buyback is essentially a process encompassed in an agreement whereby the company buys the shares from the shareholder who wishes to sell their shares. This method of selling your shares is primarily regulated by section 48 of the Companies Act no 71 of 2008. It is also considered as the most tax-efficient way for a shareholder to get their money’s worth from selling their shares since a general sale of shares will attract tax. Once the company enters into a buyback agreement with the shareholder and the transaction has been concluded, the shares that have been bought by the company are effectively ‘cancelled’. The shares go back into a pool where they will be made available again in the future for redistribution amongst the current shareholders, if necessary. These shares won’t form part of the authorized shares of the company, so a buy back is one way of making sure that the issued shares of the Company, are scaled down significantly. Before you enter into a buyback agreement, it is important to note that there are steps that the company must take before entering into such an agreement and they can be quite cumbersome.

Let’s take a further look at those steps that the company must take

Firstly, the remaining shareholders must sign a special resolution allowing the company to buy the shares back. Once the special resolution has been signed by all the shareholders, the company must then perform a liquidity and solvency test whereby the assets must either be equal to or exceed the liabilities of the company. In short, the test must indicate if the company will be able to pay its debts first as they become due (for a period of 12 months) before entering into a buyback agreement with the shareholder wanting to sell their shares. If everything above is smooth sailing, the company can then enter into a buyback agreement with the shareholder wanting to sell their shares. Here’s the cumbersome twist, you can only enter into a buyback agreement if the transaction entails purchasing less than 5% of the shares that were issued to the selling shareholder(s). If the issued shares amount to 5% or more of the total issued shares, then sections 114 and 115 of the Companies Act would be triggered. To sum up section 114 and section 115, the company must approach a qualified independent expert/appraiser to evaluate the transaction and compile a report for all shareholders and the company. The independent expert/appraiser’s report will mainly include, amongst other things, the information that directly affects the value of the remaining shares and the effects that the transaction will have on the remaining shareholders’ rights and interests. This report is especially important for minority shareholders protection, because they need to know if the transaction will significantly affect them and their shares. If the transaction does adversely affect the minority shareholders, they can then exercise their right to sell their shares in the company as well.

To sum it all up

While the company buying the shares back from a shareholder sounds like the best option for the shareholder selling, it often involves a protracted and potentially complicated procedure. It could also be costly if an independent appraiser must be appointed to give feedback on the transaction. If you are a shareholder intending on selling your shares, the best route would be to consult with a legal professional who can best advise on your options and the best way forward.

– Rushni Ebrahim