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Corporations Bill 2001

Part 2J.1 Share capital reductions and share buy-backs

   

256A   Purpose

                   This Part states the rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by:

                     (a)  addressing the risk of these transactions leading to the company’s insolvency

                     (b)  seeking to ensure fairness between the company’s shareholders

                     (c)  requiring the company to disclose all material information.



 

Division 1 Reductions in share capital not otherwise authorised by law

256B   Company may make reduction not otherwise authorised

             (1)  A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:

                     (a)  is fair and reasonable to the company’s shareholders as a whole; and

                     (b)  does not materially prejudice the company’s ability to pay its creditors; and

                     (c)  is approved by shareholders under section 256C.

A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction.

Note 1:       One of the ways in which a company might reduce its share capital is cancelling uncalled capital.

Note 2:       Sections 258A-258F deal with some of the other situations in which reductions of share capital are authorised. Subsection 254K(2) authorises capital reductions involved in the redemption of redeemable preference shares and subsection 257A(2) authorises reductions involved in share buy-backs.

Note 3:       For a director’s duty to prevent insolvent trading on reductions of share capital, see section 588G.

             (2)  The reduction is either an equal reduction or a selective reduction. The reduction is an equal reduction if:

                     (a)  it relates only to ordinary shares; and

                     (b)  it applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and

                     (c)  the terms of the reduction are the same for each holder of ordinary shares.

Otherwise, the reduction is a selective reduction .

             (3)  In applying subsection (2), ignore differences in the terms of the reduction that are:

                     (a)  attributable to the fact that shares have different accrued dividend entitlements; or

                     (b)  attributable to the fact that shares have different amounts unpaid on them; or

                     (c)  introduced solely to ensure that each shareholder is left with a whole number of shares.

256C   Shareholder approval

Ordinary resolution required for equal reduction

             (1)  If the reduction is an equal reduction, it must be approved by a resolution passed at a general meeting of the company.

Special shareholder approval for selective reduction

             (2)  If the reduction is a selective reduction, it must be approved by either:

                     (a)  a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or

                     (b)  a resolution agreed to, at a general meeting, by all ordinary shareholders.

If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled.

             (3)  The company must lodge with ASIC a copy of any resolution under subsection (2) within 14 days after it is passed. The company must not make the reduction until 14 days after lodgment.

Information to accompany the notice of meeting

             (4)  The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision on how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders.

Documents to be lodged with ASIC

             (5)  Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of:

                     (a)  the notice of the meeting; and

                     (b)  any document relating to the reduction that will accompany the notice of the meeting sent to shareholders.

256D   Consequences of failing to comply with section 256B

             (1)  The company must not make the reduction unless it complies with subsection 256B(1).

             (2)  If the company contravenes subsection (1):

                     (a)  the contravention does not affect the validity of the reduction or of any contract or transaction connected with it; and

                     (b)  the company is not guilty of an offence.

             (3)  Any person who is involved in a company’s contravention of subsection (1) contravenes this subsection.

Note 1:       Subsection (3) is a civil penalty provision (see section 1317E).

Note 2:       Section 79 defines involved .

             (4)  A person commits an offence if they are involved in a company’s contravention of section 256B and the involvement is dishonest.

256E   Signposts to other relevant provisions

                   The following table lists other provisions of this Act that are relevant to reductions in share capital.

 

Other provisions relevant to reductions in share capital

 

 

1

section 588G

section 1317H

liability of directors on insolvency

Under the combined operation of these sections the directors may have to compensate the company if the company is, or becomes, insolvent when the company reduces its share capital.

2

section 1324

injunctions to restrain contravention

Under this section the Court may grant an injunction against conduct that constitutes or would constitute a contravention of this Act.

4

sections

1001A-1001D

continuous disclosure provisions

Under these sections a disclosing entity is required to disclose information about its securities that is material and not generally available.

5

Chapter 2E

benefits to related parties to be disclosed

Under this Chapter a financial benefit to a director or other related party that could adversely affect the interests of a public company’s members as a whole must be approved at a general meeting before it can be given.

6

section 125

provisions in constitution

This section deals with the way in which a company’s constitution may restrict the exercise of the company’s powers and the consequences of a failure to observe these restrictions.

7

sections 246B-246G

variation of class rights

These sections deal with the variation of rights attached to a class of shares. This variation may be governed by the provisions of the company’s constitution.



 

Division 2 Share buy-backs

257A   The company’s power to buy back its own shares

                   A company may buy back its own shares if:

                     (a)  the buy-back does not materially prejudice the company’s ability to pay its creditors; and

                     (b)  the company follows the procedures laid down in this Division.

Note 1:       If a company has a constitution, it may include provisions in the constitution that preclude the company buying back its own shares or impose restrictions on the exercise of the company’s power to buy back its own shares.

Note 2:       A company may buy-back redeemable preference shares and may do so on terms other than the terms on which they could be redeemed. For the redemption of redeemable preference shares, see sections 254J-254L.

257B   Buy-back procedure—general

             (1)  The following table specifies the steps required for, and the sections that apply to, the different types of buy-back.

 

Procedures



[and sections applied]

minimum holding

employee share scheme

on-market

equal access scheme

selective buy-back

 

 

within 10/12 limit

over 10/12 limit

within 10/12 limit

over 10/12 limit

within 10/12 limit

over 10/12 limit

 

ordinary resolution

[257C]

yes

yes

yes

special/unanimous resolution [ 257D]

yes

lodge offer documents with ASIC [257E]

yes

yes

yes

14 days notice [257F]

yes

yes

yes

yes

yes

yes

yes

disclose relevant information when offer made [257G]

yes

yes

yes

cancel shares [257H]

yes

yes

yes

yes

yes

yes

yes

yes

notify cancellation to ASIC [254Y]

yes

yes

yes

yes

yes

yes

yes

yes

 

Note:          Subsections (2) and (3) of this section explain what an equal access scheme is. The 10/12 limit is the 10% in 12 months limit laid down in subsections (4) and (5). Subsections (6) and (7) of this section explain what an on-market buy-back is. See section 9 for definitions of minimum holding buy-back , employee share scheme buy-back and selective buy-back .

Equal access scheme

             (2)  An equal access scheme is a scheme that satisfies all the following conditions:

                     (a)  the offers under the scheme relate only to ordinary shares;

                     (b)  the offers are to be made to every person who holds ordinary shares to buy back the same percentage of their ordinary shares;

                     (c)  all of those persons have a reasonable opportunity to accept the offers made to them;

                     (d)  buy-back agreements are not entered into until a specified time for acceptances of offers has closed;

                     (e)  the terms of all the offers are the same.

             (3)  In applying subsection (2), ignore:

                     (a)  differences in consideration attributable to the fact that the offers relate to shares having different accrued dividend entitlements;

                     (b)  differences in consideration attributable to the fact that the offers relate to shares on which different amounts remain unpaid;

                     (c)  differences in the offers introduced solely to ensure that each shareholder is left with a whole number of shares.

10/12 limit

             (4)  The 10/12 limit for a company proposing to make a buy-back is 10% of the smallest number, at any time during the last 12 months, of votes attaching to voting shares of the company.

Exceeding the 10/12 limit

             (5)  A proposed buy-back would exceed the 10/12 limit if the number of votes attaching to:

                     (a)  all the voting shares in the company that have been bought back during the last 12 months; and

                     (b)  the voting shares that will be bought back if the proposed buy-back is made;

would exceed the 10/12 limit.

On-market buy-backs

             (6)  A buy-back is an on-market buy-back if it results from an offer made by a listed corporation at an official meeting of a securities exchange in Australia in the ordinary course of trading on a stock market of that exchange.

             (7)  A buy-back by a company (whether listed or not) is also an on-market buy-back if it results from an offer made in the ordinary course of trading on a stock market of a body corporate that:

                     (a)  operates a securities market outside Australia; and

                     (b)  ASIC declares in writing to be an approved overseas securities exchange for the purposes of this subsection.

A buy-back by a listed company is an on-market buy-back under this subsection only if an offer to buy-back those shares is also made on a stock market of a securities exchange in Australia at the same time.

             (8)  A declaration under paragraph (7)(b) may be subject to conditions. Notice of the making of the declaration must be published in the Gazette .

257C   Buy-back procedure—shareholder approval if the 10/12 limit exceeded

Ordinary resolution required

             (1)  If section 257B applies this section to a buy-back, the terms of the buy-back agreement must be approved before it is entered into by a resolution passed at a general meeting of the company, or the agreement must be conditional on such an approval.

Information to accompany the notice of meeting

             (2)  The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders.

Documents to be lodged with the ASIC

             (3)  Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of:

                     (a)  the notice of the meeting; and

                     (b)  any document relating to the buy-back that will accompany the notice of the meeting sent to shareholders.

257D   Buy-back procedure—special shareholder approval for selective buy-back

Selective buy-back requires special or unanimous resolution

             (1)  If section 257B applies this section to a buy-back, the terms of the buy-back agreement must be approved before it is entered into by either:

                     (a)  a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person whose shares are proposed to be bought back or by their associates; or

                     (b)  a resolution agreed to, at a general meeting, by all ordinary shareholders;

or the agreement must be conditional on such an approval.

Information to accompany the notice of meeting

             (2)  The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision how to vote on the resolution. However, the company does not have to disclose information if it would be unreasonable to require the company to do so because the company had previously disclosed the information to its shareholders.

Documents to be lodged with the ASIC

             (3)  Before the notice of the meeting is sent to shareholders, the company must lodge with ASIC a copy of:

                     (a)  the notice of the meeting; and

                     (b)  any document relating to the buy-back that will accompany the notice of the meeting sent to shareholders.

             (4)  ASIC may exempt a company from the operation of this section. The exemption:

                     (a)  must be in writing; and

                     (b)  must be granted before the buy-back agreement is entered into; and

                     (c)  may be granted subject to conditions.

257E   Buy-back procedure—lodgment of offer documents with ASIC

                   If section 257B applies this section to a buy-back, the company must lodge with ASIC, before the buy-back agreement is entered into, a copy of:

                     (a)  a document setting out the terms of the offer; and

                     (b)  any document that is to accompany the offer.

257F   Notice of intended buy-back

             (1)  If section 257B applies this section to a buy-back, the company must satisfy the lodgment requirement in subsection (2) at least 14 days before:

                     (a)  if the buy-back agreement is conditional on the passing of a resolution under subsection 257C(1) or 257D(1)—the resolution is passed; or

                     (b)  if it is not—the agreement is entered into.

             (2)  The company satisfies the lodgment requirement when it lodges with ASIC:

                     (a)  documents under subsection 257C(3) or 257D(3) or section 257E; or

                     (b)  a notice that the company intends to carry out the buy-back.

Note 1:       A company that has to lodge documents under section 257C, 257D or 257E needs to lodge a notice under paragraph (2)(b) of this section only if it wants for some reason to enter into the agreement or pass the resolution less than 14 days after lodging the section 257C, 257D or 257E documents.

Note 2:       The company may specify a buy-back under paragraph (2)(b) in any way. It may, for instance, choose to lodge a notice covering buy-backs to be carried out:

·        under a particular scheme; or

·        as part of particular on-market buy-back activity.

257G   Buy-back procedure—disclosure of relevant information when offer made

                   If section 257B applies this section to a buy-back, the company must include with the offer to buy back shares a statement setting out all information known to the company that is material to the decision whether to accept the offer.

257H   Acceptance of offer and transfer of shares to the company

Effect of acceptance of the buy-back offer on share rights

             (1)  Once a company has entered into an agreement to buy back shares, all rights attaching to the shares are suspended. The suspension is lifted if the agreement is terminated.

Shares transferred to the company and cancelled

             (2)  A company must not deal in shares it buys back. An agreement entered into in contravention of this subsection is void.

             (3)  Immediately after the registration of the transfer to the company of the shares bought back, the shares are cancelled.

Note:          ASIC must be notified of the cancellation under section 254Y.

257J   Signposts to other relevant provisions

                   The following table sets out other provisions of this Act that are relevant to buy-backs.

 

Other provisions relevant to buy-backs

 

 

 

provision

comment

1

section 588G section 1317H

liability of directors on insolvency

The directors may have to compensate the company if the company is, or becomes, insolvent when the company enters into the buy-back agreement.

2

section 1324

injunctions to restrain contravention

The Court may grant an injunction against conduct that constitutes, or would constitute, a contravention of this Act.

4

subsection 609(4) section 611 (item 19 of the table)

application of takeover provisions

These sections deal with the application of Chapter 6 to buy-backs.

5

section 259A

consequences of failure to follow procedures—the company and the officers

If a company fails to follow the procedure in this Division, the company contravenes this section and the officers who are involved in the contravention are liable to a civil penalty under Part 9.4B and may commit an offence.

6

section 256D

consequences of failure to follow procedures if reduction in share capital involved—the company and the officers

If the buy-back involves a reduction in share capital and the company fails to follow the procedures in this Division, the company contravenes this section and the officers who are involved in the contravention are liable to a civil penalty under Part 9.4B and may commit an offence.

7

section 256D

consequences of failure to follow procedures if reduction in share capital involved—the transaction

This section provides that a failure to follow the procedures for share capital reductions does not affect the validity of the buy-back transaction itself.

8

sections 1001A-1001D

continuous disclosure provisions

A disclosing entity is required to disclose information about its securities that is material and not generally available.

9

Chapter 2E

benefits to related parties to be disclosed

Under this Chapter, a financial benefit to a director or other related party may need to be approved at a general meeting before it is given.

10

section 125

provisions in constitution

This section deals with the way in which a company’s constitution may restrict the exercise of the company’s powers and the consequences of a failure to observe these restrictions.

11

sections 246B-246G

variation of class rights

These sections deal with the variation of rights attached to a class of shares. This variation may be governed by the provisions of a company’s constitution.

 



 

Division 3 Other share capital reductions

258A   Unlimited companies

                   An unlimited company may reduce its share capital in any way.

258B   Right to occupy or use real property

             (1)  If a company has a constitution, under it the company may grant to a shareholder, as a shareholder, a right to occupy or use real property that the company owns or holds under lease, whether the right is a lease or licence or a contractual right.

Note:          Before the introduction of strata or unit titles systems, rights to occupy real property were sometimes based on a holding of shares in a company.

             (2)  A company may transfer to a person an interest in land in exchange for, or in satisfaction of, a right to occupy or use the land of the kind referred to in subsection (1).

Example:    A person has a right to occupy an apartment in a block of units because they hold shares in a company. As part of converting the block of units to strata title, the person surrenders the shares in return for a transfer of strata title over the apartment. The capital reduction involved in the transfer is authorised under this subsection.

258C   Brokerage or c ommission

                   A company may pay brokerage or commission to a person in respect of that person or another person agreeing to take up shares in the company.

258D   Cancellation of forfeited shares

                   A company may, by resolution passed at a general meeting, cancel shares that have been forfeited under the terms on which the shares are on issue.

258E   Other share cancellations

             (1)  Any reduction in share capital involved in:

                     (a)  the redemption of redeemable preference shares out of the proceeds of a new issue of shares made for the purpose of the redemption (see section 254K); or

                     (b)  a company’s buying-back of its own shares under sections 257A to 257J if the shares are paid for out of share capital.

is authorised by this section.

             (2)  A company may cancel shares returned to it under section 651C, 724(2), 737 or 738 and any reduction in the company’s share capital that is involved is authorised by this subsection.

             (3)  Any reduction in a company’s share capital because of an order under section 1325A is authorised by this subsection.

258F   Reductions because of lost capital

                   A company may reduce its share capital by cancelling any paid-up share capital that is lost or is not represented by available assets. This power does not apply if the company also cancels shares.