- What is a share buyback?
A share buyback is a purchase by a company of its own shares from a shareholder. One of the main reasons for a company to purchase its own shares is to return surplus cash to shareholders.
An obvious advantage of a company implementing a share buyback is that it pays the shareholders to buy back their shares, thereafter cancels the repurchased shares, and as a consequence reduces the share capital. The effect is that fewer shares remain in circulation and the shareholder’s ownership concentration is increased and dilution offset. Share buybacks are also regarded as having certain tax efficiencies over dividends. Where repurchased shares are not cancelled, they are held by the company as treasury shares which have no rights to voting and cash flows until they are reissued.
Share buybacks are viewed with suspicion because they are deemed to ‘divert assets away from reinvestment or the claims of non-shareholders.’
There are two types of share buybacks: market purchases and off-market purchases.
We recently concluded an off-market share buyback transaction for a client and wanted to share the insights we learned.
2. Key points on share buybacks under the Companies Act, 2015 (the “Companies Act”)
Before implementing a share buyback, the Company’s shareholder agreement should be checked to ensure that there are no pre-emption provisions or any similar restrictions on the transfer of shares. Any such provisions or restrictions would need to be waived or amended before the company undertakes a buyback. Also, while there is no requirement for a company’s articles to include a specific authority for the company to be able to purchase its own shares, it would be prudent for the same to be checked to ensure that they do not restrict or prohibit the company from doing so.
Because they have an impact on share capital, share buybacks are heavily restricted. A limited company undertaking a share buyback must strictly comply with the provisions of the Companies Act. A buyback that is not carried out in accordance with Part XVI of the Companies Act is unlawful and the transaction is void and is also an offense by the company and every officer resulting in a fine of KES 1,000,000 and KES 500,000 respectively. Part XVI permits a company to buy its own shares, provided that it is not restricted or prohibited from doing so by its articles and subject to complying with the procedural requirements. The key points to note are:
- Compliance with Part XVI cannot be avoided by a company using a nominee to purchase any of its fully paid shares on its behalf.
- A limited company can only undertake a share buyback where the relevant shares are fully paid up at the point of purchase.
- There is no minimum or maximum number of shares that may be bought back by a private company under a share buyback.
Implementing a share buyback
Private companies can only undertake off-market purchases. A company may only make an off-market purchase of its own shares pursuant to a contract that is approved before the purchase.
A buyback contract is an agreement between the company and one or more shareholders whose shares are to be repurchased. The terms of the buyback contract have to be approved by a special resolution (which can be a written resolution). The member who holds shares that are subject to the share buyback is not eligible to vote on the resolution.
Please note there are no minimum or maximum price limits for off-market share buybacks and, therefore, subject to the company’s directors complying with their common law and statutory duties the price at which a company repurchases its shares can be set at any amount.
The purchase price of buyback shares must be satisfied in cash, however, in terms of the accounting entry on the other side of the balance sheet, a company can fund a buyback from distributable profits, from the proceeds of a fresh issue of shares made for the purpose of financing the buyback or out of capital under Part XVI of the Companies Act.
Payment out of distributable profits is the easiest way of funding a buy-back. This is a payment made from what would otherwise be dividends. The directors must consider whether the company will be solvent after the distribution.
At SMC, we partner with tax and accounting consultants to assist clients in choosing the best mode of financing the buyback and better understand the applicable taxes in a share buyback.
Any shares bought back by a private limited company as part of an off-market purchase:
•may be cancelled or held in treasury, if purchased out of distributable profits. If shares are held by the company as treasury shares, the company shall enter itself in its register of members as the member holding the shares.
•must be canceled, if purchased from the proceeds of a new issue of shares, from the capital.
The Company must also file certain statutory forms at the Companies Registry together with the resolutions and returns relating to the buyback. The Company register would also require updating.
Please contact Divinah Sarange Ongaki (dso@smc-legal.com or info@smc-legal.com) in case you require any clarification on the laws and procedures of implementing a share buyback in Kenyas.
