Whilst there are numerous reasons for which a company may buy back its own shares, one of the most prominent is to return surplus cash to shareholders. However, buying back shares is not the only way in which this aim can be achieved, and it is not a mechanism that is solely reserved for public limited companies (PLC’s).
A share buyback is a process whereby a company repurchases its own shares from a shareholder, or shareholders, and can be undertaken by either a private or a public company.
This course of action can be undertaken to:
- Provide an exit route for shareholders;
- Increase earnings per share or net assets per share;
- Enhance share liquidity;
- Return surplus cash to shareholders; and
However, as mentioned above, it is commonly undertaken in order to return surplus cash to shareholders resulting from, for example, a period of exceptional profitability or the sale of a business. Where this is the case, although a share buyback may be a good option, it is not the only option.
A capital reduction provides an alternative way for a company to reduce its share capital and can, in some cases, provide a greater degree of flexibility for the organisation than a share buyback, particularly in relation to the types of shares that can be cancelled, the timing of the payment and the tax implications.
A recent example of a share buyback is the tobacco company Imperial Brands.
The organisation will be repurchasing £1 billion worth of shares between 7 October 2022 and the end of September 2023 as part of the ‘strengthening phase’ of its five year strategy announced in January 2021.
This represents over 5% of Imperial’s issued share capital.
In addition, Tesco also have an ongoing share buyback programme in effect with shareholders having granted authority for the company to repurchase up to 761,988,392 ordinary shares.
The programme began on 18 October 2021 with £300 million in shares having been repurchased by 12 April 2022. The repurchase of a further £750 million of shares, announced on 13 April 2022, has brought the total cumulative value of the buyback scheme to £1.05 billion.
Is it right for my organisation?
Should you require any assistance with the numerous factors that need to be taken into account when deciding whether to proceed with a share buyback or a capital reduction, or navigating the procedure itself, our Corporate and Commercial team have the expertise to provide the advice you need.