Can a company purchase its own shares?

Published on December 2, 2022

It was for many years a well-established principle of company law that a company was not able to purchase its own shares, even if its Memorandum of Articles of Association provided that it may. The purpose of the principle was to preserve a company’s capital in the interest of creditors and to protect shareholders against directors who may have wanted to strengthen their hold on the company.

Since 1973 however, a company was allowed to purchase its own shares, but subject to a strict solvency and liquidity test and subject to a special resolution by the directors, if allowed by the company’s Memorandum of Articles of Association.

The position changed again in 2008, when Section 48 of the (new) companies Act came into operation. The Section since then enabled and regulated the acquisition by a company of a subsidiary of that company or a subsidiary of that company’s shares. Section 48 (1) – (8) contains safeguards against abuses and regulates the acquisition by a company of its own shares. The underlying rationale for these safeguards contained in Section 48 flow from the risks inherent in the repurchase of a company of its own shares. These risks are summarized as follows:

Because a repurchase is (i) a distribution of the company’s assets and (ii) a re-organization of issued share capital (and hence ownership), achieved by (iii) a transfer to a company of its shares, it invites all the abuses associated with each of these functions

YEATS, COMMENTARY ON THE COMPANIES ACT OF 2008, VOLUME 1, p. 2-460.

The safeguards contained in Section 48 (1) – (8) are designed to reduce/remove the risks inherent in the repurchasing of its shares by a company. Companies may in particular circumstances use the right to purchase its own shares to their advantage. When a director and shareholder resigns from a company, the company may consider purchasing the shareholder’s shares, instead of allowing a new shareholder in the company. Strict compliance with Section 48 is however to be observed.

The question may arise as to whether the required purchase price for the shares represents a fair value thereof. The procedure dealing with the appraisal of shareholder’s rights (shares) is contained in Section 164 of the Act.

The procedure and rights are clearly designed to protect a shareholder/seller against abuse by the remaining shareholders. It can also be argued that the company is, as a result thereof, also protected against unreasonable expectations from seller/shareholders in regard to the value of their shares.

C.M. Weiss
Practicing Consultant