Corporate Governance, Insights

Share Buyback Scheme an Unexplored Corporate Management Tool

A share buyback occurs when a company repurchases its shares from its shareholders. It is a situation where a company is investing in itself. In the past, this had given room to unscrupulous managers and promoters of companies to perpetrate fraud by creating an artificial buoyancy of the shares of companies and encourage dangerous speculative trading of shares by buying back shares through loans and luring the unsuspecting general public into dealing in those shares under the erroneous financial health of the companies created by them.
Yet, share buyback could also serve as a legitimate corporate management tool to deliver more value to a company’s shareholders and stakeholders in the capital market.

In fact, it could be positively employed by a company to achieve including but not limited to:
1. returning surplus cash to shareholders;
2. increasing the underlying share value;
3. supporting the share prices during temporary weakness;
4. achieving or maintaining a target capital structure;
5. preventing or inhibiting unwelcome take-over bids.

For these and other positive uses, a share buyback mechanism can be deployed, the Companies and Allied Matters Act (CAMA) Cap C20 LFN, 2004 and the Securities and Exchange Commission (SEC) Rules allow companies albeit with restrictions to buy back their shares.
As the economy continues to recover from the global financial recession, share buy-back has become a veritable option to companies who are flushed with cash but experiencing depressed share prices, in ensuring long time investors confidence. The anticipated move by companies to embark on this scheme in order to add more values and increase the demand for their shares necessitates the need to examine the scope of the restrictions placed on companies as regards the manner in which the buyback will be carried out, the procedures, time frame and proportion. By the same token, this write-up also examines and articulates the general requirements and procedure in CAMA for the reduction and cancellation of share capital, a consequent action upon the repurchase of shares, as a company cannot act as its own shareholder.

This will be done by outlining the requirements of CAMA as they relate to share buyback with emphasis on public companies, bearing in mind that buybacks are normally employed by publicly quoted companies whose shares are freely traded on the market and subject to the provisions of the SEC Rules . Although, this piece focuses on the public companies, discussion of this scheme shall also entail its applicability by private companies, the restriction on the share transfer , the fact that their shares are not traded on the market thereby making it difficult if not impossible to determine the value of their shares through the company performance or the market and the different legal consequences vis a vis public companies…




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