12 Sep

'A Shareholder Has Left the Business. Can the Company Buy Back Their Shares?' by Thomas Linnane, LegalVision

A share buy-back is a process that allows a company to purchase its own shares from all or some of its shareholders. Consequently, the shares that have been ‘bought back’ are cancelled, and the percentages of the remaining shareholders increase proportionally. The Australian Securities and Investments Commission (ASIC) heavily regulates buy-backs, meaning a company must follow a specific process if it wants to buy back a shareholder’s shares. It is usually preferable to find an alternative to a buy-back in these situations, but there are occasions when a company will need to proceed with the buy-back process. This article will discuss a share buy-back and why a company may want to perform one following a shareholder exit. 

What is a Buy-Back?

share buy-back occurs when a company repurchases shares from one, some or all of its shareholders. The company then cancels these shares, reducing the total number of shares on issue. 

There are three types of share buy-back for private companies:

  • equal access buy-back – all shareholders are offered the buy-back in proportion to their shareholding;
  • selective buy-back – the company only wishes to buy-back the shares of one shareholder; and
  • employee share scheme buy-back – the buy-back of shares held by employees or directors under an employee share scheme.

In the case of a shareholder leaving the business, a selective buy-back is the most appropriate. 

Performing a Buy-Back for a Leaving Shareholder

One of the most common circumstances where a buy-back becomes necessary is where a shareholder’s shares are subject to vesting conditions, and the shareholder has left the business before their shares have vested. In these cases, the company may not wish for these people/entities to retain a shareholding in the company. This is because having shares comes with voting rights, rights to dividends, and the right to payment on an exit event. 

If a shareholder exits the business before satisfying the vesting conditions, it is not fair for the company or other shareholders to retain the rights attached to those shares when they have not earned them. Consequently, the company will usually perform a selective buy-back for these unvested shares.

Whether that shareholder is a “good leaver” or a “bad leaver” will significantly impact the selective buy-back, especially for the number of shares they are allowed to keep and the price per share payable by the company.

The difference between a good and bad leaver is as follows:

  • bad leaver – arises when the shareholder has exited the business because they have done something wrong, such as breaching their employment agreement, committing fraud, or a serious indictable offence; and
  • good leaver – arises when the shareholder has left the business without any fault, for example, resigning before their vesting period is up, becoming bankrupt or insolvent, or death/total permanent disability. 

Performing a Selective Buy-Back

A selective share buy-back is a heavily regulated process. The first step will always be to check whether the company’s constitution or shareholders agreement contains a specific buy-back process in relation to the shares subject to the buy-back. If so, the company will need to follow this process (as long as it does not contradict the Corporations Act).

The following section details the process your company must take if your shareholders agreement and constitution are silent on buy-backs.

1. Prepare and Circulate Documents

Your company should prepare the following in anticipation of the buy-back:

  • board and shareholders’ resolutions to approve the buy-back;
  • buy-back agreement, to be entered into between the company and the shareholder; and
  • an explanatory memorandum, which explains to the shareholders the effect of the buy-back on the company.

At this stage, your company board can approve the buy-back, but the shareholders should not sign their resolution just yet.

2. Lodge With ASIC

Once the board approves the buy-back, it should lodge a form 280 with ASIC. As part of this form, the board should lodge the following:

  • signed explanatory memorandum; 
  • unsigned shareholders resolution; and
  • unsigned buy-back agreement.

Once you lodge these documents with ASIC, you will need to wait at least 14 days to allow ASIC to object. In practice, you should allow slightly longer to account for postage times and other delays.

3. Complete the Buy-Back

Once the waiting period passes, the shareholders can execute their resolution to approve the buy-back. Your company should also circulate the signed explanatory memorandum at this time so shareholders have sufficient information to make an informed decision about the buy-back.

Once this occurs, your company can finalise the buy-back and cancel the shareholder’s shares. The final step will be to notify ASIC of the cancellation of the shares in accordance with the buy-back agreement.

Key Takeaways

The buy-back process is heavily regulated and often is not preferable to alternatives (such as transferring shares to another party). However, this process is required in certain circumstances. The effect of a buy-back is that your company will purchase its own shares from a shareholder, resulting in a cancellation of those shares and the percentages held by remaining shareholders increase. There are three main types of buy-back, but in the case of a departing shareholder, the relevant process is a selective buy-back.

If you need help performing a selective buy-back, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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