Share repurchases and the protection of
KATHLEEN VAN DER LINDE**
From a creditor’s perspective there is not much difference between the payment of a dividend in respect of a share and a payment for the acquisition or repurchase of that share. However, from the point of view of the shareholder a dividend is a return on capital while a repurchase is a return of capital to the vendor shareholder. Share repurchases change the structure of the company’s share capital and consequently also the allocation of rights among shareholders.1 A repurchase combines a distribution to the selling shareholder with an increase in the relative stakes of the non-selling shareholders.2 Alternatively, a repurchase has also been described as a constructive dividend to non-vendors which they use to buy out vendors.3 Dugan explains that repurchases are tripartite in nature and thus pose different types of risks.4 A repurchase comprises (1) a distribution of assets with the attendant risks of asset stripping and debt avoidance, (2) a reorganisation of ownership with the risk of unfair and discriminatory treatment of shareholders, and (3) a transfer of shares which may lead to insider trading and market manipulation.5 W hile repurchases pose risks for the company, its shareholders, creditors and the investing public, this article concerns the protection of shareholders.
The risk faced by shareholders depends on the type of repurchase involved. In a selective repurchase the company acquires shares from one or more specific shareholders only. The reason may be to accommodate a shareholder in a closely held company who upon reaching retirement age wants to withdraw her investment from the company. Getting rid of a troublesome shareholder is another motivation. It stands to reason that the price paid by the company is fundamentally important. If it is too low, the non-selling shareholders will benefit at the expense of the vendor. This is particularly problematic if the shareholder is being coerced into selling her shares to the company, but is also an issue in consensual sales where the company is withholding price sensitive information from the shareholder. Should the price be too high, the value of the shareholding of non-selling shareholders will be diluted.
T his article is partially based on Van der Linde Aspects of the Regulation of Share Capital and Distributions to Shareholders (2008 thesis SA).
Professor of Mercantile Law, University of Johannesburg.
See Van der Linde “The regulation of conflict situations relating to share capital” 2009 SA Merc LJ 33 37-39 for a discussion of the allocation function of share capital. See Brudney “Equal treatment of shareholders in corporate distributions and reorganizations” 1983 California Law Review 1072 1106.
See Dugan “Repurchase of own shares for New Zealand” in Farrar (ed) Contemporary Issues in Company Law (1987) 98.
TSAR 2010 . 2
[ ISSN 0257 – 7747]
3/31/10 11:06:33 AM
SHARE REPURCHASES AND THE PROTECTION OF SHAREHOLDERS
This is one of the main concerns in a targeted repurchase where a company buys out a potential bidder in order to avoid a takeover, also referred to as “greenmail”.6 In a self-tender or pro rata offer the company offers to acquire shares from shareholders who are willing to sell, as far as possible on a proportionate basis. Such a repurchase may be motivated by the company’s desire to return invested capital it can no longer employ profitably in its business operations, or to influence the net earnings per share. Provided that each shareholder takes up the offer so that the company acquires a proportionate part of the shareholding of every shareholder, the balance of power in the company will be unaffected and the price paid will have no discriminatory effect among shareholders. But once it is assumed that not everyone will accept the offer, it...
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