Learn about the legal requirements and considerations related to share buybacks in South Africa, including the reasons businesses may engage in share buybacks, the types of share buybacks available, and the benefits and risks of this corporate finance strategy.

What is a Share Buyback?

Share buyback or share repurchase is when a company buys back its own shares from its shareholder/s.

Share buybacks are a corporate finance strategy that involves a company repurchasing its own shares from existing shareholders. In South Africa, share buybacks are regulated by the Companies Act of 2008, which outlines the legal requirements and considerations related to this strategy. In this article, we'll explore what businesses need to know about share buybacks in South Africa, including the reasons businesses may engage in share buybacks, the types of share buybacks available and the benefits and risks of this corporate finance strategy.

Reasons for Share Buybacks

There are several reasons why businesses may engage in share buybacks, including:

• Returning capital to shareholders: Share buybacks can be a way to return capital to shareholders, particularly in situations where the company has excess cash or is unable to find profitable investment opportunities.

• Boosting share price: Share buybacks can also boost the company's share price by reducing the number of outstanding shares, which can increase earnings per share and improve the company's valuation.

• Defensive move: Share buybacks can also be a defensive move, to prevent hostile takeovers or dilution of control by outside shareholders.

Types of Share Buybacks

In South Africa, there are two types of share buybacks available:

• On-market buybacks: On-market buybacks involve the company purchasing its own shares on the open market, through a stock exchange.

• Off-market buybacks: Off-market buybacks involve the company purchasing its own shares directly from existing shareholders, either through a tender offer or negotiated agreement.

Legal Requirements for Share Buybacks

In South Africa, share buybacks are regulated by the Companies Act of 2008, which outlines the legal requirements for this strategy. Some of the key requirements include:

• Shareholder approval: Share buybacks require approval from the company's shareholders, either by way of a special resolution or a board resolution.

• Solvency and liquidity test: Before engaging in a share buyback, the company must conduct a solvency and liquidity test, to ensure that the company can still pay its debts as they become due, and that the buyback will not result in the company becoming insolvent.

• Reporting requirements: Companies must report on share buybacks in their annual financial statements, including the number of shares repurchased, the price paid for the shares, and the funding source for the buyback.

Legal Considerations for a Share Buyback

Whilst a share buyback can be a tax-efficient alternative to return money to shareholders, it has to be carefully considered as it could have some intended consequences and is not appropriate for all situations.

Solvency and Liquidity Considerations

A buyback falls within the definition of a ‘distribution’ in terms of the Companies Act, and as a result the board must satisfy itself that the company’s assets are either equal to or exceed its liabilities prior to the buyback taking place.

Shareholder Impact

The percentage of the shares being purchased by a company also need to be considered as if the buyback involves the acquisition of more than 5% of the total shares within any class of its shares, Sections 114 and 115 of the Companies Act need to be complied with.

Capital Gains Tax

Share repurchase transactions in certain circumstances may be subject to capital gains tax (“CGT”) or may be deemed to be ‘dividend’ and as a result, trigger dividends tax.

What is a Share Buyback Agreement?

A share buyback agreement is entered into between the Company and the shareholder/s in terms of which the company agrees to buy back share/s owned and held by shareholder/s and will specify, inter alia, the purchase purchase, payment method and/or schedule and any representations or warranties by the parties thereto.

Benefits and Risks of Share Buybacks

Share buybacks offer several benefits for businesses, including:

• Increasing shareholder value: Share buybacks can increase shareholder value by reducing the number of outstanding shares, which can increase earnings per share and improve the company's valuation.

• Flexibility: Share buybacks offer flexibility in terms of the timing and amount of shares to be repurchased, allowing businesses to adjust their strategy based on market conditions and other factors.

However, share buybacks also present several risks, including:

• Reducing liquidity: Share buybacks can reduce the liquidity of the company's shares, making it more difficult for investors to buy or sell shares.

• Misuse of funds: Share buybacks can be misused if the company engages in buybacks when it has more profitable investment opportunities or if the buybacks are funded through debt, which can increase the company's financial risk.

Conclusion

Share buybacks are a corporate finance strategy that can provide businesses with a range of benefits, including returning capital to shareholders and boosting share prices. However, it is important for businesses to comply with the legal requirements for share buybacks, including obtaining shareholder approval, conducting a solvency and liquidity test, and reporting on the buyback in their annual financial statements. By understanding the benefits and risks of share buybacks, businesses can make informed decisions about whether this strategy is appropriate for their financial goals and objectives, and ensure that they are using this strategy in a responsible and effective manner.

Barter McKellar’s corporate lawyers have extensive experience advising corporates on share buybacks and all other forms of corporate restructures. If you would like to find out more, contact our offices today to schedule a consultation with one of our specialist corporate law attorneys.