According to the Companies Act, a limited liability company may engage in stock buyback. This means, that the company buys its shares from shareholders, who are willing to sell. Stock buyback may be carried out for a number of reasons. During a company’s lifetime, the need for equity fluctuates. For instance, the company may have excess cash, in which case stock buyback can be used to refund funds to shareholders without deviating from the dividend distribution policy. From a taxation perspective, stock buyback can be a more advantageous way of distributing assets, and it can be used, for example, as a complement to dividend. Especially as regards foreign shareholders, it may be substantially more advantageous to receive distributions in this manner. Other reasons for stock buyback may include the need to reduce the equity portion of the company’s financing (in order to use a more favorable form of financing), or to avoid the dilution of long-term shareholders’ holdings, for example in a situation where shares are at the same time subscribed pursuant to an option scheme.
Stock buyback cannot be used in a manner that would result in the company becoming insolvent. From an accounting perspective it should be noted, that the acquired treasury shares are not entered into the balance sheet as assets. Therefore, the purchase price reduces the amount of the company’s distributable assets. A public limited liability company may hold a maximum of 10 per cent of its stock. A private limited liability company may not acquire or redeem all of its outstanding shares.
Stock buyback requires a resolution of the general meeting of shareholders. In a public company, the resolution requires a qualified majority of two thirds of both votes cast and shares represented at the meeting.
The general meeting of shareholders may also grant an authorization to the Board of Directors to take the stock buyback decision. Such authorization can remain in effect for a maximum of 18 months, and enables stock buyback using available unrestricted equity only. The authorization must include the maximum quantity of shares to be acquired in each class of shares, the period of validity of the authorization, and the minimum and maximum purchase price.
Stock buyback can also be carried out by way of a directed acquisition. This means that shares are not acquired proportionally to the amount of shares held by the shareholders. Use of directed buyback requires a weighty financial reason. Particular attention should be paid to the relationship of the offered purchase price and fair market value of the share. In a listed company, buyback is usually executed in public anonymous trading at a market price, which in practice means that the buyback is a directed acquisition. A resolution of the general meeting of shareholders regarding directed acquisition, as well as an authorization to the Board of Directors, unless it explicitly excludes directed acquisition, requires qualified majority of two thirds of both votes cast and shares represented at the meeting.
A decision of a general meeting of shareholders or the Board of Directors regarding stock buyback shall contain the following items:
quantity or maximum quantity of shares to be acquired per each share class,
the shareholders from whom the shares are to be acquired and, if necessary, the order in which the acquisition is to take place, and, as regards directed acquisition, justification for the existence of a weighty financial reason,
the period during which the shares to be acquired are to be offered to the company,
consideration to be paid for the shares and the grounds for determination of the consideration and, if assets other than money are to be given as consideration, an account of the value of the said assets,
the date of payment of the consideration and
the effect of the buyback procedure on the company’s equity.
The company has a disclosure obligation, as set forth in the Companies Act, to shareholders who, according to the buyback decision, are entitled to sell shares to the company.
In a public limited liability company, the stock buyback decision cannot be made in a way that would result in the company holding in the aggregate more than one tenth of all shares. A private company is not permitted to acquire all of its outstanding shares.
Stock buyback by a listed company is in addition regulated by the Securities Markets Act, rules and regulations of the relevant stock exchange and the European Commission Regulation issued pursuant to the Market Abuse Directive (Directive on Insider Dealing and Market Manipulation).
A company may hold, cancel or transfer the acquired shares. The Board of Directors may decide to cancel shares held by the company. The cancellation shall be submitted to the Trade Register for registration, and the shares will be cancelled upon registration of the cancellation.