Guernsey Company Law Series: Buyback or repurchase of own shares

• Guernsey has a flexible corporate regime for the return of capital and income to shareholders, and a Guernsey company may fund the acquisition of its own shares

• There are different requirements for market and off market acquisitions

• This guide sets out the requirements and effect of such acquisitions

Acquisition of own shares

In order to effect a share buyback by a Guernsey company, the company's memorandum or articles of incorporation must contain an authorisation allowing the company to acquire its own shares.

The share buyback is made on the terms provided for in the company's memorandum or articles of incorporation, or the terms of issue of the shares being repurchased.

Importantly, a member whose shares are to be acquired is excluded from exercising the voting rights which attach to the shares subject to the share buyback when voting on the ordinary resolution to effect the buyback (as set out below), unless the member is the sole shareholder of the company.

A company must, following a share repurchase, continue to have at least one member.

Funding an acquisition of own shares

There is no requirement for a company to acquire its own shares out of a particular account or source.

Off-market versus market acquisitions

For off-market acquisitions, the shareholders of the company must, by ordinary resolution, approve the share buyback before the contract for the repurchase of shares is entered into by the company. The member whose shares are to be acquired is excluded from voting on the resolution (unless the member is the sole shareholder of the company) in respect of the shares which are to be acquired. In the case of an acquisition for the purpose of an employee share scheme, the ordinary resolution must also specify the minimum and maximum amount that may be paid for the shares.

The authority granted by ordinary resolution must specify a date on which the authority expires, but it may be varied, revoked or renewed by another ordinary resolution.

In the case of market acquisitions (broadly, for shares in a company which are listed/traded on a recognised investment exchange), as with off-market acquisitions a company may only undertake a share buyback if authorised by ordinary resolution of the shareholders. This authority may be general in nature or limited to the acquisition of shares of a particular class or description. Further, the authority may have conditions attached or be unconditional.

The authority must specify:

• the maximum number of shares authorised to be acquired; and

• set out the minimum and maximum prices which may be paid for the shares.

Further, similar to off-market acquisitions, an expiry date must be specified for the authorisation, although this can be varied, revoked or renewed by another ordinary resolution.

The rights of a company under a contract pursuant to an off-market or market acquisition are not capable of assignment. The company cannot release its rights under such contract unless such release is approved by ordinary resolution.

Treated as a distribution

The acquisition by a company of its own shares is treated as a distribution under the Law. In addition, any payment made by a company in consideration of the following is also considered a distribution:

• acquiring any right in respect of acquiring its own shares pursuant to a contract for an off-market acquisition;

• the variation of a contract for an off-market acquisition; or

• the release of any of the company's obligations in respect of the acquisition of any of its own shares under a contract for an off-market or market acquisition.

Solvency Certificate

Given a share buyback is considered a distribution, in accordance with section 303 of the Law, the directors of a company may only sanction a share buyback if they are satisfied that the company will, immediately after the distribution, meet the solvency test set out under section 527 of the Law (meaning that the company is able to pay its debts as they become due, and the value of the company's assets is greater than the value of its liabilities).

Shares either cancelled or held in treasury

The shares which are the subject of the buyback may be cancelled on acquisition, and the company's share capital reduced accordingly, or may be held in treasury (if authorised to do so).

The information contained in this guide is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.