Share buyback agreements are becoming increasingly popular with private companies in Australia. This type of agreement allows a company to buy back shares from its shareholders, allowing the shareholders to realise the value of their investment. This article will explore the benefits of share buyback agreements for private companies in Australia, the process for completing a share buyback agreement and the potential risks associated with such agreements.
What is a Share Buyback Agreement?
A share buyback agreement is an agreement between a company and its shareholders that enables the company to buy back shares from the shareholders. This allows the shareholders to realise the value of their investment by selling their shares to the company instead of for example, selling the shares to a third party or directly to other shareholders. It is also an effective way for a shareholder to exit a company by being “bought out”.
Benefits of Share Buyback Agreements
Share buyback agreements are becoming increasingly popular with private (and public) companies in Australia. There are several benefits for both the company and the shareholders. For example, a share buyback agreement can be a cost-effective way to reduce the number of shares outstanding. By doing so, the company can reduce its share capital and increase the value of the remaining shares, as there are fewer shares to be divided among the shareholders.
For the shareholders, a share buyback agreement can be an effective way to realise the value of their investment. By selling their shares back to the company, the shareholders can realise the value of their shares without having to find a buyer on the open market.
How to Set Up a Share Buyback Agreement
Share buyback schemes are regulated by ASIC under the Corporations Act 2001 (Cth) and there a number of steps which must be taken before a share buyback is completed. While there are different types of share buybacks such as selective, equal access, employee share and on-market (public companies), each type of private share buyback scheme will usually require most, if not all of the following steps:
- The company must prepare a proposed share buyback agreement which is a lengthy document which outlines all the rights and obligations of the company and the shareholder(s) selling their shares.
- The company must obtain shareholder approval to enter the share buyback agreement. This may be required to be done through a special or ordinary resolution. This will require the company to prepare a notice of meeting and an explanatory statement detailing the proposed buyback scheme which the company must disclose. The company must also prepare minutes of the meeting.
- If the shareholders approve the scheme, then the buyback agreement must be signed by the shareholders and directors of the company. The company must then advise ASIC of the approval
- Once the agreement has been registered, the company is legally obligated to buy back the shares in accordance with the agreement and the shares will be cancelled by ASIC upon receiving notification.
Potential Risks of Share Buyback Agreements
Although share buyback agreements can be a beneficial option for both the company and its shareholders, there are some potential risks associated with such agreements. One of the main risks is the potential for selling shareholders to be underpaid for their shares. This can occur if the company undervalues the shares or if the shareholders are not properly informed of the value of their shares. Additionally, there is the potential for conflicts of interest between the company and its shareholders. If the company’s directors are also shareholders, they may be tempted to undervalue the shares in order to benefit themselves. This can create a conflict of interest between the company and its shareholders.
Further, if a share buyback causes the company to become insolvent, the liquidator may be able to recover compensation from the selling shareholders or the director(s).
How Lynn & Brown can help you
Completing a share buyback scheme is a very technical process which requires various legal documents to be prepared and ASIC forms to be completed. Whether you are seeking some advice in relation to a share buyback agreement or if you are you are looking to have one completed, get in touch with Lynn & Brown by calling 9375 3411 to make an appointment. We have a team of well versed commercial lawyers.
About the authors: This article has been co-authored by James Williams and Steven Brown. James was admitted to the Supreme Court of WA as a lawyer in 2021 after graduating from Murdoch University in 2020 where he received a Bachelor of Laws and Bachelor of Business (Finance). Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.
