The steep sell-off of shares amid the COVID-19 crisis is challenging the survival toolkit of a number of listed companies. But for a stock market that many believe was inflated, a significant hit presents significant buying opportunities for investors, traders and listed companies themselves!
Why conduct a buy-back now?
In such situations where share prices have fallen significantly, it is not unprecedented for directors of listed companies (with sufficient cash resources) to implement a buy-back scheme so that the company can capitalise on discounts in the company’s share price to what the directors consider to be fair value for the company’s shares. Buy-backs conducted in these circumstances may have the effect of improving shareholder value, stabilising its share price (particularly where the shares have been over-sold) and providing a liquidity solution for shareholders to realise cash in potentially a tax effective manner.
In addition, buy-backs can send a strong signal to the market that the directors consider the company’s current shares are undervalued and also signal to investors that the company has healthy cash reserves. These can promote confidence in the company.
How can buy-backs be implemented?
Under s257A of the Corporations Act, a buy-back may only be implemented if the buy-back does not materially prejudice the company’s ability to pay its creditors. We generally recommend that this analysis be performed on both a short-term solvency and long-term basis. Section 257B of the Corporations Act provides for the various types of buy-backs that may be conducted which include:
- On-market buy-back;
- Equal access scheme;
- Minimum holding buy-back;
- Selective buy-back; and
- Employee share scheme.
Equal access schemes and on-market buy-backs are particularly effective ways of launching a buy-back to capitalise on current share prices.
In the context of these two types of buy-backs, it is important to note that so long as a company is not proposing to buy-back more than 10% of the smallest number of its voting shares in the preceding 12 months (known as the ’10/12 limit’), no shareholder approval will be required. This means these buy-back programs can be implemented quickly. Further, these buy-backs are not generally as document intensive as other types of buy-backs such as those requiring shareholder approvals, which means they can often be cost effective also.
An on-market buy-back is essentially a ‘first come, first served’ offer to purchase shares in the ordinary course of trading from shareholders at the prevailing share price (subject to the terms of the buy-back and the rules of the exchange). Usually, the company appoints a broker to ‘stand in the market’ and purchase shares on behalf of the company.
An equal access scheme is a buy-back program which acts as an offer to all ordinary shareholders to buy-back the same percentage of their ordinary shares. This type of buy-back requires the company to afford all ordinary shareholders a reasonable opportunity to accept the offer and the terms of all the offers must be the same (subject to certain matters such as consideration adjusted for capital amounts unpaid, accrued dividend entitlements or rounding).
There are other requirements that need to be observed in the Corporations Act and listing rules of applicable stock exchanges (such as the ASX and NSX) including requirements around pricing a buy-back and required disclosures. If you wish to discuss these requirements further, please contact us.
If you have any further questions about buy-backs or how COVID-19 may affect your business, please contact a member of our team to obtain legal advice.
Written by: Venks Ananthakrishnan and PJ Beran