Share buybacks or share repurchases are transactions involving a company that buys back shares from one or more of its shareholders. Companies conclude share buybacks for various reasons, such as providing capital to their shareholders, providing an avenue for when a shareholder wants to exit the company, as well as increasing the earnings per share by reducing the number of outstanding shares. 

Advantages of share buybacks
By looking at the advantages of share buybacks, one can see why they are such a popular mechanism for everyday restructurings. One of the biggest advantages of a share buyback is that the transaction can be structured so that the definition of a “dividend” will apply. This is beneficial because, in terms of the Income Tax Act 58 of 1962, dividends between two South African companies are exempt from income tax. It should be noted that there remain exceptions to this and it is important that you advise a professional to ensure that you do not fall prey to unintended tax consequences.

Furthermore, according to our tax system, a share buyback will not be seen as a disposal and, therefore, not be subject to capital gains tax.

Although share buybacks sound very attractive, one should carefully consider the legislation governing share buybacks, as the non-compliance can constitute that the transaction is voidable and that the directors of the particular company who voted for the transaction can be held personally liable for the non-compliance.

Requirements for a share buyback
Share buybacks are governed by certain tax legislation and section 48 of the Companies Act 41 of 2008 ("Act”). The Act provides for certain requirements for a share buyback transaction. The first requirement is that all company shareholders should consent to the buyback. This is done by either a board resolution or a special resolution.
 
The latest amendments introduced by the Companies Amendment Act 16 of 2024 (the “Amendment Act”), have changed some of the requirements for share buy backs. The amendment maintains the requirement for shareholder approval when reacquiring shares from a director, prescribed officer, or any related person. However, the Amendment Act removes the 5% acquisition threshold and instead mandates shareholder approval for all share acquisitions, except in two cases. A special resolution is not required for a share buyback conducted through a pro-rata offer to all shareholders, even if it includes shares held by directors, prescribed officers, or their related persons. Additionally, transactions executed on a recognised stock exchange where the shares are traded will also not require a special resolution. The company must also in certain circumstances comply with sections 114 and 115 of the Act, which includes obtaining independent expert reports as well as required approvals.

In addition to the above, a company wishing to conclude a share buyback transaction must satisfy the solvency and liquidity test. This entails that a company must satisfy that it can, after the share buyback, still pay its debts as it will become due and payable. It must satisfy that the company will not become insolvent upon the transaction.
 
These are only a few requirements, and a company should comply with all legislation when implementing a share buyback transaction to prevent non-compliance.

It is advisable to consult with your attorney or a specialist for assistance in your share buyback transactions in order to implement it correctly and to avoid non-compliance, which may result in liabilities and unintended tax consequences. 


Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).