A share buyback or repurchase is a move by a company to buy its own shares and either cancels them or holds them as treasury shares. Only repurchased ordinary shares can be held as treasury shares.
The most common reason for companies to buy back their shares is because they have excess capital that they cannot effectively (or profitably) use in their business. Share buybacks can help boost the financial ratios by creating a positive impact on the company’s earnings per share (EPS) and return on equity (ROE). This makes the business look more attractive by taking advantage of the undervaluation of shares and reducing the overall cost of capital.
A company can undertake a share buyback in any of the following circumstances:
- Make an off-market purchase of its own shares after seeking members’ approval during a general meeting
- Make a selective off-market purchase of its own shares after members pass a special resolution to approve this purchase. Shareholders whose shares are being acquired must abstain from voting
- Make an acquisition of its own shares under a contingent purchase contract after members pass a special resolution to approve this purchase.
A company typically funds a share buyback using capital and profits. If a share buyback is funded by profits, then a lower amount of profits will be available for distribution as dividends in the future.
The main difference between a share buyback and a reduction of share capital is that in a share buyback, the shareholder can refuse to sell his shares. But in a reduction of share capital, some shareholders may have their shares canceled against their will. Also, during a reduction of share capital, shareholders may not necessarily receive any payment for their canceled shares because the aim of the exercise is to achieve certain corporate goals rather than to return capital to shareholders.
Speak to us if you need to cancel or buy back company shares.