There are 4 main sections of the Companies Act, No. 71 of 2008 (the “Act”) that need to be taken into account (aside from sections 44 and 45 governing the provision of financial assistance) when a company buys back shares from a shareholder, namely:
Section 4: which provides that the company must be able to satisfy the solvency and liquidity test as provided in that it will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered or date following a distribution.
Section 46: which sets out the circumstances in which a company’s board of directors may authorise a distribution (which definition for distribution in section 1 of the Act incudes a share buy-back). Section 46(1)(b) in particular, provides that a distribution may not be made unless the company is able to satisfy the solvency and liquidity test immediately after a distribution is made.
Section 48: which contains important provisions relating to the buy-back of shares and makes it very clear that a company can only buy back shares if other shares of the company will remain in issue after the share buy-back. Section 48 (8)(b) of the Act states that a share buyback is subject to the requirements of sections 114 and 115 “if, considered alone or together with other transactions in an integrated series of transactions, it involves the acquisition by the company of more than 5% (five percent) of the issued shares of any particular class of the company’s shares”. Based on the wording of section 48(8), where a company acquires at least 5% (five percent) of any class of its shares in terms of section 48, whether in terms of one or more transactions, the acquisition will be subject to section 114 and section 115. From interpreting the wording of clause 48(8), it can be assumed that where the share buy-back is for less than 5% (five percent) of any class of shares of the company, it will be sufficient for the company to comply only with the provisions of section 48 i.e. there will be no requirement to comply with the added provisions of sections 114 and 115.
Section 114: which provides that the company must retain an independent expert to compile a report in line with the requirements of section 114(3) by understanding the type of arrangement proposed, evaluating the consequence of the share buy-back and assessing the effect of the arrangement on the value and rights and interests of the remaining shareholders.
Section 115: which provides that any share buy-back will need to first be approved by a special resolution of the shareholders of the company.
Before contemplating a share buy-back, no matter how simple or complicated the transaction may seem, it is important to carefully consider the proposed arrangement against the above sections of the Act, especially if the share buy-back is for more than 5% (five percent) of any particular class of the issued shares of the company or is to be acquired from a director or prescribed officer of the company.