Share buyback refers to the repurchasing of shares by the company that issued them. The repurchase is often made from the company’s existing shareholders, usually at a price near to or higher than the prevailing market price. Upon the conclusion of the buyback transaction, the repurchased shares are either classified as treasury shares or are cancelled. Where the company’s shares are classified as treasury, that portion of shares of a company are kept in the Company’s own treasury and are not available to the public. As a result, the number of outstanding shares in the market are reduced.
Share buy backs are known to be more prevalent in the US than in other markets, although recent trends show that the concept has been embraced in Europe as well as in Asia, with Japan experiencing a number of share buy-back transactions in recent years. Following a ravaging pandemic that affected the world’s major economies, in the US as in other markets, several companies have announced share buy backs in 2021 and more are projected to follow. A number of multinationals including AMD, Apple and American business magnate Warren Buffett’s Berkshire Hathaway, have recently embarked on large stock buyback transactions.
Companies buy back their own shares for various reasons. Alongside dividend pay-outs, share buybacks are one of the common ways for companies to share their wealth with investors since they not only cause price appreciation, but also increase investors’ ownership stake due to the reduction in the number of outstanding shares. Once bought back, the shares no longer get dividends, voting rights and are not included in calculating earnings per share (EPS). Buybacks are also used to distribute excess cash conveniently to shareholders. In addition, they are used to avoid threats of possible hostile takeovers. Furthermore, share buy backs are resorted to, in order to absorb increases in shares outstanding that has arisen from previous employee stock options or and/or to utilize extra cash by using the repurchases in lieu of special dividends.
Share Buy Back in Kenya
Share buy backs have not been a common phenomenon in Kenya. The first one since the enactment of the Companies Act, 2015 is the ongoing share buyback by Nation Media Group (NMG). In late May, NMG Board of Directors recommended that the firm’s shareholders effect the Share Buyback plan by way of open market purchases through on the Nairobi Securities Exchange. The Company is proposing to buy back up to 10% of the issued shares (about 20,739,652 shares). The transaction is awaiting shareholder approval at the Company’s AGM slated for later this month.
It is anticipated that more companies will be considering share buy backs in the coming future, for various reasons highlighted above. For these companies, one of the questions they may have to deal with is what the legal framework on share buy backs is in Kenya. We address this below.
The law on Share Buy backs in Kenya
The primary law on share buy backs in Kenya is the Companies Act, 2015. Part XVI of the Act contains provisions on acquisition by limited company of its own shares. Salient requirements under that part include the following:
i. General Restrictions for buy backs by limited companies.
As a general rule, section 424 of the Act provides that a limited company shall not acquire its own shares, whether by purchase or otherwise except as otherwise permitted. Section 447 of the Act permits a limited company having a share capital to purchase its own shares, subject to the law and any restriction or prohibition in the company's articles. Instructively, a limited company may not purchase its own shares if as a result of the purchase, there would no longer be any issued shares of the company other than redeemable shares or shares held as treasury shares. This means that the company cannot buy all its shares back. In addition, a limited company may only purchase its own shares if they are fully paid.
ii. Financing of the Buybacks.
There are restrictions as to the financing of the share buybacks. Under section 449 of the Act, a listed company may only buy back its shares out of the distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose of financing the purchase. Companies are however permitted to pay for the buy backs from capital but upon compliance with very stringent requirements under the Act. Notably, these restrictions as to the financing of the buy-back do not apply to private companies unless their articles of association adopt them.
iii. Mode of executing the Buy Back.
Under Kenyan law, the company may only purchase its shares through two ways. Firstly, it may purchase through an off-market purchase. This may be effected under a contract approved in advance through a prescribed special resolution of the company. In the alternative, the company may purchase the shares through a market purchase subject to approval of the shareholders through a prescribed resolution. If the buyback is by way of a market purchase, the purchased shares are required to be held and dealt with as treasury shares under part XXI of the Companies Act. In any other case, the Act requires that the shares are cancelled and the amount of the company's issued share capital is diminished by the nominal value of the shares cancelled.
iv. What Happens if the Company fails to purchase its shares?
Like the case in many other jurisdictions, companies that announce proposals for share buy backs are not tied down to follow through. Under section 484 of the Act, a company that agrees to purchase its own shares is not liable in damages for failing to redeem or purchase any of the shares.
v. Filing of returns upon acquisition.
Section 464 of the Act requires that within 14 days after a company purchases shares, it shall lodge with the Registrar for registration a prescribed return. In the case of a public company, the return must specify the aggregate amount paid by the company for the shares and the maximum and minimum prices paid in respect of shares of each class purchased among other details.
CMA Regulation and Approval.
For listed companies, the approval of CMA is required in accordance with the Listing and Disclosure Regulations. CMA has formulated draft guidelines on share buybacks for listed companies but these are yet to come into force. The draft Guidelines require that prior to the making of the proposal for the buyback to shareholders, the company is required to circulate a CMA- approved circular detailing all terms and conditions of the proposed share buyback. In the event of an intended off-market purchase, the draft share buyback contract shall be submitted to CMA accompanying the shareholders’ circular for CMA approval, in line with the requirements of private transactions. Though in draft form, the Guidelines outline CMA’s understanding of the requirements in the Act and they seem to have informed the processes that NMG followed in the buyback proposal.
In this article, we have provided an overview of the concept of share buy backs. We have also outlined, in brief, the applicable law on share buy-backs in Kenya. It is anticipated that more listed companies will consider share buy backs in the coming months and years, given the positive projections of growth of the economy following the resurgence of the markets after the covid-19 pandemic.
Article by Enock Mulongo
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