SHARES represent and reflect ownership in a company. The idea of a company buying its own shares may therefore seem strange, since that could suggest that the company may buy and own pieces of itself. However, when a company makes payments to get back its shares, it does not become the owner of its shares in the same way that shareholders may own shares in the company. Quite often when a company makes payments for its shares, it is in the context of a redemption or buy back of shares.

Redemption

A company’s Articles of Incorporation may authorise it to issue shares which by the terms of the issue will or may, at the option of the company, be redeemed. Redemption of shares is like the company buying back the shares from the shareholders, except that when shares are redeemed, they cease to exist.

The company’s stated capital represents the value of shares in the company. On redemption, voting rights attached to redeemed shares will be suspended, and the amount of the company’s issued share capital will be diminished by the value attributed to those shares in the company’s stated capital account. As such, if the company redeems shares the total number of outstanding shares is reduced and this can lead to an increase in the value of the remaining shares. The redemption of shares by a company is, however, not to be taken as reducing the amount of the company’s authorised number of shares. Where a company is about to redeem shares, it has the power to issue shares up to the value of the shares to be redeemed so as to, if the company is so minded, replace the shares to be redeemed.

It is important to note that a share should not be redeemed except out of the company’s profits or revenue reserves which would otherwise be available for payment of dividends, or out of proceeds of a fresh issue of shares made for the purpose of the redemption.

Buy back

A company may, if its Articles of Incorporation permit, purchase or otherwise acquire its issued ordinary shares. Notwithstanding, statute prohibits the company from buying back all of its ordinary shares. Similar to where shares are redeemed, the purchase of shares that are not redeemable results in suspension of all rights attached to such shares. The amount of the company’s issued share capital will also be diminished by the value attributed to those shares in the stated capital account.

A company is not permitted to make any payment to purchase or otherwise acquire shares issued by it unless a statutory declaration is made by not less than 75 per cent of the company’s directors or all of the directors (depending on the applicable section of the Companies Act) and lodged at the Registrar of Companies, to the effect that (depending on the applicable section of the Companies Act) there are no reasonable grounds for believing that:

(a) the company is, or would after the payment be, unable to pay its liabilities as they become due;

(b) the realizable value of the company’s assets would, after the payment, be less than the aggregate of its liabilities and stated capital; or

(c) the realizable value of the company’s assets would after the payment be less than the aggregate of its liabilities and the amount required for payment on a redemption or in a winding up of all shares, the holders of which have the right to be paid prior to or rateably with the holders of the shares to be purchased or acquired.

That statutory declaration must be based on:

(a) the company’s audited accounts made up no more the 12 months before the date of the statutory declaration;

(b) the company’s unaudited accounts made up no more than 45 days before the date of the statutory declaration; and

(c) any other relevant facts of which the directors are aware.

A company may choose to purchase its own shares for different reasons including to:

(a) increase the value of remaining shares;

(b) preserve share prices;

(c) consolidate ownership of shares in the company for select shareholders;

(d) return cash to shareholders by a means other than by the payment of dividends.

In addition, the Companies Act expressly provides for instances where a company may, if permitted by its Articles of Incorporation, choose to purchase or acquire its shares. These include to:

(a) settle or compromise a debt or claim asserted by or against the company;

(b) eliminate fractional shares or a portion of an equity that is less than one share; or

(c) fulfill the terms of a non-assignable agreement under which the company has an option or is obliged to purchase shares owned by an officer or an employee of the company.

In summary, a company can buy its own shares, and this can be beneficial to its remaining shareholders and the company at large. A company choosing to redeem, purchase or acquire its own shares should be careful to ensure it complies with applicable law which may be different in each case.

Kimberley Brown is an Associate at Myers, Fletcher and Gordon and a member of the firm’s Commercial Department. She may be contacted at kimberley.brown@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.