When a shareholder of a private company is looking to exit the company, their shares must be dealt with in accordance with the Company’s constitution, any Shareholders Agreement and the Corporations Act 2001 (Cth). Shareholders Agreement may contemplate the exiting shareholder to sell the shares to the remaining shareholders, or to the Company (for a share buy-back). For a share buy-back the procedural requirements need to be kept in mind as well as the tax consequences.
Share buy-backs can be effective as a means of distributing surplus funds, reducing the equity of a company (e.g. where the company wishes to increase its debt financing) or as part of a tax-effective way to restructure the ownership of the company or balance sheet.
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- The benefits of share buy-backs for companies are often overlooked.
- Determining the best method requires consideration of the tax implications, the structure of the company and the tax positions of each individual shareholder.
- It is important to ensure compliance with ASIC, the Corporations Act 2001 (Cth) and the constituent documents of the company (e.g. constitution, shareholders agreement). Obtaining legal advice is strongly recommended to reduce risk, ensure that any restructure of share capital is completed smoothly and lawfully and avoid unnecessary disputes.