Can a private company buy back its own shares?

Until the introduction of the Corporate Laws Amendment Act of 2006 that came into operation on 14 December 2007 a company was unable to purchase its own shares.

Can a private company buy back its own shares?

Until the introduction of the Corporate Laws Amendment Act of 2006 that came into operation on 14 December 2007 a company was unable to purchase its own shares.

The amendments now allow companies to purchase their own shares and to reduce capital without the formalities that were previously required. A company is permitted to acquire shares issued by it if authorised to do so by its articles of association and a special resolution passed at a general meeting of shareholders. The company must however, apply one of two tests before it may buy back its own shares, viz.: 

(i)               The ‘solvency test’ requires that a company may only acquire its own shares if after their acquisition the assets of the company, fairly valued, exceed the liabilities of the company. 

(ii)              The ‘liquidity test’ provides that the company must be able to pay its debts after the acquisition.

Similarly, section 38 of the Companies Act specifically prohibited a company from giving financial assistance to any ‘person’ for the purchase of shares whether such assistance was given directly or indirectly. However, this prohibition no longer applies in the following instances:

(i)               A loan by a company to a trust which purchases shares on behalf of employees. 

(ii)              A loan to employees, other than directors, to enable them to purchase or subscribe for shares in the company. 

(iii)             A company whose main business is the lending of money.

The amendment to section 38 of the Companies Act allows companies to provide financial assistance for black economic empowerment shareholders to purchase shares in the company. Often, potential BEE partners lack funds to purchase company shares, leading to intricate structures, high interest rates and having to turn to financial institutions which may be reluctant to provide financing without sufficient security.  Now companies will, subject to compliance with the amended section, be able to fund share purchases with simpler structures and at lower interest rates - a boost for BEE deals.