Share Buybacks Law: A Guide for Companies and Shareholders

Share buybacks can be a powerful tool for companies looking to boost their stock price and reward shareholders. Companies can use their cash reserves to buy back their own shares, reducing the number of outstanding shares and increasing the value of each remaining share.

This can have a positive impact on the company's stock price, as fewer shares mean each share is worth more. For example, if a company has 10 million shares outstanding and buys back 1 million, the remaining 9 million shares are now worth more.

In the United States, the Securities and Exchange Commission (SEC) requires companies to disclose their share buyback plans in a Form 8-K filing. This filing must include details such as the number of shares to be bought back and the total amount of money allocated for the buyback.

Companies must also disclose the reasons behind their share buyback plans, which can include reducing debt, returning cash to shareholders, or increasing stock price.

Companies buy back shares for several reasons. One of the main reasons is to return surplus cash to shareholders. A company may have surplus cash due to outstanding profitability or the sale of a business, and it's not efficient to have excess cash without a planned use. Shareholders want to see a return on their investment, and a buyback is one method of doing so.

Companies may also use share buybacks to increase earnings per share. By reducing the number of outstanding shares, a buyback can improve a company's price/earning ratio and thus increase earnings per share. This can lead to an increase in share price, which is beneficial for shareholders.

Some companies enter into share repurchases to offset dilution from employee stock options, mergers and acquisitions, or other dilutive contracts. This helps to maintain the value of the shares and prevent dilution.

Here are some key reasons why companies choose to undertake a share buyback:

In some cases, a company may use a buyback to purchase shares issued to an employee under an employee incentive scheme when they cease to be employed by the company. This ensures that the shares are not sold to a third party, and the remaining shareholders do not have to pay any money to the exiting shareholder.

Funding a share buyback can be done in several ways, including from distributable profits, the proceeds of a fresh issue of shares, or out of capital.

A company can also use cash to fund a buyback, but only up to a certain amount. Specifically, the company can use up to the lower of £15,000 or 5% of its share capital in any financial year.

If a premium is payable on shares to be bought back, it must be paid out of distributable profits, unless the shares were issued at a premium, in which case the premium can be paid out of a fresh issue of shares.

Here are the possible funding options for a share buyback:

Shareholders who own the shares on the record date for the tender offer can participate in the buyback, but those who fail to sell their shares before the end of the specified period will not be able to use this option.

Funding a buyback can be done through various means, but it's essential to understand the options available to you.

You can fund a buyback from distributable profits, which means you've made a profit that can be distributed to shareholders.

Alternatively, you can issue new shares specifically for financing the buyback, or use cash up to a certain amount.

Here are the specific funding options:

If a premium is payable on shares to be bought back, it must be paid out of distributable profits, unless the shares were issued at a premium, in which case the premium can be paid out of a fresh issue of shares.

Shares must be paid for at the time of purchase, and any excess amount paid over the original capital subscribed is taxed as an income distribution.

To be eligible for a tender offer, you need to own the shares on the record date for the offer. This date is set by the company and is crucial to determining who can participate.

Shareholders who fail to sell their shares before the end of the specified tender period will not be able to use this buyback option. They can, however, sell their shares in the open market.

The tender period is set by the company and is typically open for at least 20 business days. If there are any material changes within 10 days of the expiration of the tender offer period, the period must be extended.

A company may repurchase its shares from the open market or directly from shareholders. A shareholder agreement can provide that before selling their shares to third parties, shareholders must offer them to other shareholders or the company first.

A company can repurchase shares via a tender offer, which can be structured as a "fixed price" or a "Dutch Auction". A tender offer is generally made for a fixed number of shares (or a fixed dollar amount) and has to be open for at least 20 business days.

A company needs to be mindful of its open and closed trading windows when determining when to repurchase shares. If a company is in an open window, it can give orders to a broker on any day that it does not have any material nonpublic information.

A company may also consider buying back shares during a closed period, but it must enter into a plan that complies with the requirements of Rule 10b5-1. This plan must be established at a time when the company has no material nonpublic information.

Share buybacks can be used to offset dilution from employee stock options, mergers and acquisitions (M&A), or other dilutive contracts. Some companies also enter into share repurchases to utilize excess cash flow rather than keeping the cash on the balance sheet.

An Enhanced Open Market Repurchase ("eOMR") is an increasingly popular execution alternative that provides volume-weighted average price (VWAP) economics similar to an Accelerated Share Repurchase (ASR) but with the flexibility of an open market program.

Companies can repurchase shares efficiently and benefit from stock price volatility using this strategy.

The Matthews South eOMR eliminates substantially all excess cost associated with sourcing this strategy from banks.

Share buybacks can be a complex and high-stakes process, and it's essential to be aware of the risks involved.

Companies that fail to comply with internal control issues associated with share buybacks, such as Andeavor and Charter, may face significant penalties. The SEC's focus on insider trading enforcement, 10b5-1 plans, and share buybacks highlights the importance of compliance.

To avoid issues, educate authorized individuals about the relevant parameters, including not initiating a buyback when the company is aware of MNPI. The test of awareness is at the company level, and the MNPI inquiry includes all executives, employees, and even directors.

Here are some key considerations to keep in mind when it comes to share buybacks:

Accelerated Share Repurchase (ASR) may seem like a convenient way to buy back shares, but it's not without its risks. One major consideration is the upfront commitment, which can be difficult to unwind once the initial delivery of shares occurs.

If not structured carefully, an ASR may complete when it's advantageous for the company to continue buying shares, resulting in missed opportunities.

The complexity of ASRs can be overwhelming, requiring intricate documentation, disclosure, and accounting analysis to navigate the many unanticipated events that can occur before the ASR is completed.

Here are the specific risks associated with ASRs:

It's essential to educate authorized individuals about the relevant parameters when it comes to share buybacks. This includes not initiating a buyback when the company is aware of Material Non-Public Information (MNPI), which affects everyone from executives to directors.

The SEC is cracking down on insider trading enforcement, 10b5-1 plans, and share buybacks. Companies need to be proactive in avoiding internal control issues.

To avoid potential issues, it's crucial to implement a system where authorized individuals understand the importance of not initiating a buyback when MNPI is present. This includes all executives, employees, and even directors.

Sharing real-world horror stories, like the Andeavor and Charter cases, can help inspire a stronger sense of awareness around compliance within in-house legal teams.

If a company refuses to repurchase shares despite specific terms in the shareholder agreement, the aggrieved shareholder can file a claim for breach of contract and shareholder oppression. In such cases, the Court may order the company to purchase a minority shareholder's stock.

Here are some key takeaways to keep in mind:

The 1 Percent Excise Tax has a significant impact on corporations that repurchase their own shares. Under this tax, corporations like Chevron will owe $750 million in excise taxes for its $75 billion buyback plan.

A 1 percent excise tax is much lower than a 15 to 23.8 percent income tax rate on dividends, but it's still a step towards tax parity between buybacks and dividends. This indirect approach lowers corporations' total assets and reduces the value of their shares.

The excise tax creates a clear preference for dividends among shareholders not subject to tax, who own about 35 percent of US stocks and are primarily comprised of non-taxable retirement accounts.

In the United States, public companies must follow specific rules for share buybacks that are not tender offers.

Rule 10b-18 provides a safe harbor from liability under certain market manipulation rules and Rule 10b-5 under the Exchange Act, as long as the conditions for repurchases are met.

This non-exclusive rule allows issuers and affiliated purchasers to buy back shares without facing potential liability.

The Securities Exchange Act of 1934 as amended (Exchange Act) governs these rules, and the US Securities and Exchange Commission has proposed amendments that could change how share repurchases are executed.

The rules that apply to share buybacks are numerous, but two of the most commonly referenced are Rule 10b-18 and Rule 10b5-1 under the Securities Exchange Act of 1934 as amended.

These rules are often referred to as "safe harbors" that provide guidelines to reduce potential liability under US securities laws when their requirements are met. Rule 10b-18 is non-exclusive, providing a safe harbor to issuers and certain of its affiliated purchasers from liability under certain market manipulation rules and Rule 10b-5 under the Exchange Act.

The SEC has proposed amendments to these rules, so potential changes to how share repurchases are executed are likely when those proposals are finalized. It's worth noting that the SEC's Vacated Share Buyback Disclosure Rule, which was intended to enhance the existing reporting regime, has been vacated due to litigation.

Here are the key rules that apply to share buybacks:

Having a lawyer by your side can make a significant difference in the outcome of your case. A skilled Shareholder Disputes Lawyer can be of great assistance in protecting your interests and navigating the complexities of shareholder disputes.

A lawyer experienced in shareholder disputes brings a deep understanding of corporate and contract law, ensuring your rights are upheld and your case is well-prepared. This expertise can help you avoid costly mistakes and ensure you're not taken advantage of.

A lawyer can act as a mediator, facilitating discussions between you and the company to find a mutually agreeable solution. This can often resolve disputes before they escalate to full-scale litigation.

Your lawyer will meticulously review the company's articles of incorporation, bylaws, shareholder agreements, and any relevant contracts to assess the validity of the buyback refusal and identify potential breaches. This thorough review can help you understand the company's obligations and your rights as a shareholder.

If negotiation fails, your lawyer can draft legal documents, including demand letters and legal complaints, to initiate legal action against the company. This can help you assert your rights and hold the company accountable for any breaches.

In cases where litigation becomes necessary, your lawyer will represent you in court, presenting a compelling case to ensure your shareholder rights are protected. This can give you peace of mind and help you achieve a favourable outcome.

Your lawyer will assess the damages you may be entitled to, explore remedies like injunctive relief or specific performance, and work to secure a favourable outcome. This can help you recover any losses or damages you've suffered as a result of the buyback refusal.

Here are some key ways a Shareholder Disputes Lawyer can assist you:

Companies may repurchase shares from the open market or directly from shareholders. This can be a way to utilize excess cash flow rather than keeping it on the balance sheet.

Some companies use share buybacks to offset dilution from employee stock options, mergers and acquisitions, or other dilutive contracts. This can help maintain ownership and control.

A shareholder agreement can provide that before selling their shares to third parties, shareholders must offer them to other shareholders or the company first. This can prevent the dilution of ownership and give shareholders more control over the company's shares.

Before initiating a share buyback, companies need to have a robust process in place to assess whether they possess material nonpublic information (MNPI). This process should involve a method to learn of MNPI, such as an email sent by the general counsel to executive officers.

The general counsel should send an email to the CEO, CFO, treasurer, and other relevant executive officers to confirm that the company is not in possession of MNPI. This email should include examples of what constitutes MNPI, such as pending M&A, significant legal or regulatory proceedings, or a pending announcement related to a new collaboration or loss of a partnership.

Companies may choose to repurchase shares for several reasons, including to utilize excess cash flow, offset dilution from employee stock options, or mergers and acquisitions. Share buybacks can also increase earnings per share (EPS).

The CEO, CFO, and treasurer should generally be included in the email to confirm the absence of MNPI, and others may be included depending on the company. It's also a good idea to send a similar email or call to the chair or lead director of the board, as applicable.

Stock dilution can indeed reduce market capitalization, but let's break it down. A share repurchase will reduce the market capitalization of a company by reducing the number of shares outstanding, and this decrease should be equivalent to a dividend paid of the same amount.

The key takeaway is that stock dilution can have a direct impact on market capitalization. This is because the market capitalization is the product of the shares outstanding and the stock price.

Here are some key points to consider:

In essence, stock dilution can be a double-edged sword for companies, as it can reduce market capitalization but also signal a positive business outlook or commitment to capital return.

If the company declines your request for a share buyback, it's essential to take swift action to protect your rights as a shareholder. A company is obligated to repurchase its shares if the conditions mentioned in the shareholder agreement for the share buyback are satisfied.

You can send the company a demand notice, which should briefly describe the triggering event and propose to sell your shares per the terms of the shareholder agreement. This notice serves as formal notice to the company of your intention to sell your shares.

If the company refuses to repurchase your shares or objects to the price offered, you can commence the dispute resolution process. Many shareholder agreements provide that the shareholders must resolve their disputes through alternative dispute resolution (ADR) methods such as mediation, arbitration, or med-arb.

In mediation, a neutral third party facilitates dispute settlement through discussion, but the mediator cannot make a binding decision in the matter. If the dispute is not resolved using one of the ADR methods or the shareholder agreement does not contain an enforceable dispute resolution clause, you can sue the company.

You can also file a shareholder oppression claim against the company, which allows you to approach the Court if the corporation or a majority shareholder acts in a way that is oppressive, unfairly prejudicial, or disregards the interests of a minority shareholder.