A company can reduce its share capital in a number of ways under the Corporations Act 2001 – The two most common methods are:
- A share capital reduction; or
- A share buy-back.
The Corporations Act limits a company’s ability to reduce its share capital prior to the company being wound up. The main reason for this is to protect the interests of creditors who are faced with the principle of limited liability should the company become insolvent, but also acts to protect the interests of and ensure fairness between shareholders.
A share buy-back differs from a share capital reduction in that shareholders are not obliged to accept the company’s offer for a share buy-back. By contrast a share capital reduction can affect shareholders who voted against the decision.
A SHARE CAPITAL REDUCTION involves returning the money (although not always) that was originally paid by a shareholder to acquire shares, to that shareholder, while cancelling those shares.
Section256B of the Corporations Act 2001 states that a company may only reduce its share capital if the reduction:
- is fair and reasonable to the company's shareholders as a whole; and
- does not materially prejudice the company's ability to pay its creditors (although this is not relevant if the shares are cancelled for no consideration); and
- is approved by shareholders under section 256C.
A share capital reduction can be either:
- An equal reduction which may be passed by a simple majority, unless stated otherwise in the company’s constitution. This type of share capital reduction is one
- which relates only to ordinary shares;
- applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and
- the terms of reduction are the same for each holder of ordinary shares; or
- A selective reduction which must be approved by either;
- a special resolution with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or
- a resolution agreed to by all ordinary members.
Further, if the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a separate meeting of the members whose shares are to be cancelled.
This type of share capital reduction is one which relates to any other reduction where the criteria for an equal reduction are not met.
In either case, a Form 2560 Notification of reduction in share capital details must be lodged with ASIC along with notice of the meeting at which it is proposed to pass the resolution to reduce the share capital and any document relating to the reduction that will accompany the notice of the meeting sent to members. Notice must be no less than 29 days before the meeting for Public companies and 22 days for any other company. A single member is not required to give notice of a meeting, however will still be required to lodge a Form 2205 once the resolution is passed.
Once the decision has been made to reduce share capital, a Form 484 Change to company details must then be lodged with ASIC notifying them of the changes.
A SHARE BUY-BACK involves a company offering to purchase some or all of the shares of a shareholder. There are a number of different categories of share buy-back, the most common of which for non-listed companies are equal access and selective.
Section 257A states that a company may buy back its own shares if:
- the buy-back does not materially prejudice the company's ability to pay its creditors; and
- the company follows the procedures laid down in this Division – being Division 2 of Part 2J.1 of the Corporations Act.
An all access buy back is the simplest form of buy back and involves all ordinary shareholders receiving an identical offer to sell the same percentage of their shareholding back to the company. Different rules also apply between share buy-backs involving 10% or less of the total shares to be purchased within a twelve-month period, and share buy-backs involving over 10% (the 10/12 limit).
If the buyback is within the 10/12 limit then shareholder approval is not required, however, if a proposed share buy-back is over the 10/12 limit then it can only take place following passage of an ordinary resolution. Once these requirements have been complied with, and the share buy-back has been carried out, the company will need to notify ASIC of the change in share structure by lodging a Form 484.
A selective buyback occurs where identical offers are not made to every shareholder, for example where offers are only made to some members of the company. This type of buyback must either be:
- approved by all shareholders, or
- by a special resolution (requiring a 75% majority) of the members in which no vote is cast by selling shareholders or their associates. Selling shareholders may not vote in favour of a special resolution to approve a selective buy-back.
The 10/12 limit does not apply to this type of buy-back.
Where shareholder approval for a buy-back is required, a Form 280 Notification of share buy-back details must be lodged with ASIC before the notice of meeting and associated documentation is sent to shareholders. If the company wants to enter into the buy-back agreement within 14 days of lodging the Form 280, than it will also have to lodge a Form 281 Notice of intention to carry out a share buy-back.
Once these requirements have been complied with, and the share buy-back has been carried out, the company will need to notify ASIC of the change in share structure by lodging a Form 484.