Generally, a company may not return any assets to its members while it is a going concern except in the form of dividends paid out of available profits. As members of a company limited by shares enjoy limited liability, the law ensures that a company is not allowed to return assets to its members to the prejudice of its creditors as such assets are to be used to pay creditors in the event of a winding up. Hence, a company may not acquire its own shares and this prohibition is expressly provided for in the Companies Act.
OBJECTIONS AGAINST SHARE BUYBACKS
Aside from ensuring that creditors’ interests are safeguarded and not prejudiced by a return of share capital, other reasons for the prohibition on share buybacks include protecting shareholders against the risk of abuse by company directors who can increase their voting power when the company buys back its shares or arrange for their own shares to be bought at inflated prices. The prohibition on share buybacks also protects the investing public against manipulation of share price by companies that may use share buybacks to prop up their share price.
PERMITTED SHARE BUYBACKS UNDER THE COMPANIES ACT
Despite the general prohibition on share buybacks, the Companies Act allows a company to buy back ordinary shares and preference shares when certain prescribed requirements are met. The share buyback provisions were introduced to provide companies with an expedient and cost-efficient means of returning cash to shareholders. Such share buybacks afford a company with flexibility in the timing, procedure and amount of capital to be returned to shareholders. It thus increases a company's ability to adjust its capital structure and debt-equity ratio and can improve a company's return on capital, to the benefit of shareholders.
In the case of private companies, share buybacks may be useful as (i) they provide a mechanism for companies to resolve disputes with dissenting members and (ii) they allow a company's funds to be used to purchase an outgoing member's shares instead of requiring the remaining members to raise funds for such purchase.
The Companies Act sets out appropriate safeguards that have been formulated to ensure that share buybacks will not be conducted to the detriment of shareholders and creditors. These include the following:
- companies will only be able to buy back their shares if their Articles of Association allow for it;
- shareholders’ approval is required; and
- a solvency test must be satisfied.
Methods of Share Buyback
There are four methods by which a company may acquire its own shares:
- Off-market purchase on an equal access scheme. Available to both listed and unlisted companies, this method involves an off-market purchase (otherwise than on a securities exchange) made in accordance with an equal access scheme.
- Selective off-market purchase. Available only to unlisted companies, this method involves an off-market purchase made in accordance with an agreement but which is not in accordance with an equal access scheme.
- Contingent purchase. Available to both listed and unlisted companies, this method involves a purchase by a company of its own shares under a contract entered into by the company and relating to any of its shares (a) which does not amount to a contract to purchase or acquire those shares, but (b) under which the company may (subject to any condition) become entitled or obliged to purchase or acquire those shares.
- Market purchase. Available only to listed companies, this method involves a purchase by a company of its own shares on a securities exchange.
Increase in Share Buyback Limit
With effect from 1 October 2013, the limit on the total number of a company’s issued ordinary or preference shares that a company may buy back under the Companies Act has been raised from 10% to 20%.
The Ministry of Finance (MOF) explained that this increase in limit enables a Singapore-incorporated company to have greater flexibility in buying back its shares and takes reference from the company law in other jurisdictions, for example, the United States, Canada, United Kingdom and Hong Kong, which do not impose share buyback limits.
Notwithstanding the increase in the limit, share buybacks carried out by companies must continue to adhere to the requirements in the Companies Act. As seen above, such requirements were designed to safeguard the interests of shareholders and creditors.
Although the new 20% limit applies to all companies incorporated in Singapore, SGX-listed companies will continue to be subject to the existing 10% limit, as currently stipulated in SGX’s listing rules. This approach is consistent with the practices in other jurisdictions where listed companies are subject to a tighter share buyback limit imposed by exchanges through their listing rules, instead of through company law.