Buying out a Shareholder
The most common reason that private companies buy back their shares is to buy out one of the shareholders in circumstances where:
- The other shareholders are not able or willing to purchase his/her shares; or
- A purchase of the relevant shares by the company is the most tax efficient method of buying out the shareholder.
A shareholder may wish to exit the Company for a number of reasons, for example, he may:
- Have fallen out with the other shareholders;
- Wish to retire or pursue other business interests; or
- Want or need to raise cash.
In the event that the remaining shareholders do not purchase the exiting shareholder’s shares, the option of the company buying them is normally preferable to selling them to a third party (for companies with a small number of shareholders).
NOTE: On a buyback, the purchase price is paid directly to the exiting shareholder(s). This is in contrast to a reduction of share capital which usually results in a distributable reserve which may be available to be distributed to shareholders generally.
To return surplus cash to Shareholders
It is generally inefficient for a company to hold large amounts of cash. Therefore, unless the company has a specific reason to retain this cash it may be advisable to return it to the shareholders. One way to return this cash to shareholders is to effect a buyback.
If a company is intending to increase its gearing it should ensure that this does not breach the terms of any financing arrangements that it has in place.