Share Buybacks in Singapore: Procedure, Cost and More
When a company has excess capital that it wishes to return to their shareholders, it might do so in the form of distributing dividends, capital reduction or buying back its own shares.
This article is targeted at owners of private companies (not public ones) who are thinking of conducting the last option – namely, a share buyback – and want to know more about it. This includes the advantages and disadvantages of share buybacks, as well as how to actually conduct one in Singapore.
Read on to find out more about:
What is a Share Buyback?
A share buyback (or “repurchase”) is where a company buys its own shares (i.e. shares in that same company) from its shareholders. Once the shares are repurchased, those shares can be dealt with in one of the following two ways:
- The repurchased shares can be cancelled, i.e. all rights attached to the shares will expire and the company will reduce its share capital accordingly. When the shares are cancelled, they cannot be sold or re-allotted in future.
- (In the case of repurchased ordinary shares) The repurchased shares can be held as treasury shares, i.e. the shares will be held in the company’s treasury, with no attached voting or dividend rights. However, these treasury shares can be sold or allotted to other people at a later date.
For unlisted companies, a share buyback can be done in three ways:
- Make an off-market purchase of its own shares through an equal access scheme (i.e. all shareholders are given a chance to sell their shares to the company under the same terms). This can be done after seeking members’ approval during a general meeting.
- Make a selective off-market purchase of its own shares (i.e. the purchase is not made through an equal access scheme). This can be done after members pass a special resolution to approve this purchase. Shareholders whose shares are being acquired must abstain from voting.
- Make an acquisition of its own shares under a contingent purchase contract (i.e. a contract where the company need not buy the shares immediately, but where an option or obligation to purchase those shares arises based on any condition specified in the contract). This can be done after members pass a special resolution to approve this purchase.
How does a share buyback differ from the reduction of share capital?
The biggest difference between a share buyback and a reduction of share capital is that when a company reduces its share capital, some shareholders may have their shares cancelled against their will. This is as opposed to a share buyback, where a shareholder may choose not to sell their shares back to the company.
In addition, while the shareholders who sell their shares to the company will be paid for the sale of their shares, shareholders might not be paid for their cancelled shares during a capital reduction exercise.
Hence, from the perspective of the company, conducting a share buyback may be more desirable compared to a reduction of share capital. Note, however, that it is an offence for a director or CEO of a company to authorise a share buyback if he or she knows that the company is not solvent. Such an offence is punishable with a fine of up to $100,000 and/or imprisonment of up to 3 years.
How does a share buyback differ from the issuance of dividends?
Share buybacks and the issuance of dividends are both ways that a company can reward its shareholders.
However, when a shareholder receives a payment for the purchase of his shares in a share buyback, he or she will no longer hold any rights attached to those shares. This is because those shares will now either be cancelled or held by the company as treasury shares. In contrast, when a shareholder receives a dividend payment, the shareholder still retains those shares.
For shareholders who did not sell their shares (e.g. where the buyback was not made under an equal access scheme), or had chosen not to sell their shares, during the share buyback exercise, they may receive an indirect payment in that the value of their shares may go up (capital gain). This is because the buying back of shares reduces the number of outstanding shares for a company. This in turn improves various measures and ratios that investors look at to price the stocks, such as earnings per share (EPS), cash-flow-per-share and return on equity (ROE). In theory, this should drive the share price higher over time.
In this sense, a share buyback is another way of increasing a shareholder’s return on owning shares in a company. However, this type of capital gain from share buybacks is an uncertain return compared to dividends.
From the company’s perspective, share buybacks are not required to be paid out of profits, whereas dividends are. If a company does not have sufficient distributable profits to pay a dividend, then it may wish to use a share buyback to return capital to shareholders instead.
In Which Situations Might a Company Want to Execute a Share Buyback?
According to the Accounting and Corporate Regulatory Authority (ACRA), the most common reason why companies execute a share buyback is that they have excess capital that they cannot effectively or profitably use in their business.
Companies can also increase their financial ratios by reducing their outstanding share capital, thereby increasing their EPS and ROE as mentioned above.
Other reasons for share buybacks include:
- The company buys the shares because it believes them to be under-valued, and it can later re-issue those shares to increase share capital without issuing new shares
- Buying back shares following employee compensation plans like share option schemes or employee share purchase plans
- For example, the shares that the company buys back can be allocated to employees as stock compensation in the form of an option to purchase the shares from the company at a predetermined price.
- Reducing the cost of capital (e.g. from paying dividends to shareholders)
- Returning of cash to shareholders
- Lack of sufficient distributable profits to pay a dividend
- Lack of willingness to provide solvency statements for capital reduction (as mentioned above)
- Exiting a shareholder from a company without risking that the exiting shareholder’s shares are offered to a third-party
- To adjust the proportions in which shareholders hold shares or consolidate ownership in the company, e.g. to defend against hostile take-overs
- Replace equity capital with debt capital for e.g. tax optimisation purposes
Nevertheless, there are some disadvantages of share buybacks including:
- Giving a possibly unrealistic picture of the company’s finances through improved ratios, especially if actual earnings have not increased.
- Using the company’s capital or profits to fund share buybacks might cause a company to miss out on other investments (e.g. investing back into the business) that could grow the company. This could possibly create a long-term negative effect on the stock price.
- Boosts to share prices from share buybacks can be short-lived.
- Funding a share buyback with debt might cause a company to become over-leveraged.
- A company might end up buying back its shares at an overvalue.
How Many Shares Can a Company Buy Back?
The following limits apply to share buybacks in Singapore during the period from the relevant general or special resolution, to the date of the next Annual General Meeting (AGM):
- Up to 20% of ordinary shares (excluding any ordinary shares held as treasury shares)
- Up to 20% of non-redeemable preference shares
- No limit on the number of redeemable preference shares
It should be noted that while a company is able to hold ordinary shares as treasury shares, the aggregate number of shares held as treasury shares must not exceed 10% of the total number of shares in that class at any time.
What are the Prerequisites For Executing a Share Buyback?
Before conducting a share buyback, the company must meet the following requirements:
- The company’s constitution must expressly permit share buybacks
- The total number of ordinary shares or preference shares purchased before the next AGM is held or required to be held (whichever is earlier) does not exceed the limits described above
- The company must not be insolvent
- Shareholder approval needs to be obtained (see below)
What is the Procedure For Making a Share Buyback?
Obtaining authority from shareholders
To execute a share buyback, a private company must first obtain authority from its shareholders to conduct the share buyback.
The procedure for obtaining this authority depends on which of the three available different buyback processes mentioned above is used. In summary, however, each process will require either approval during a general meeting or through a special resolution to approve the purchase. See below for more details.
Lodging resolution and notice of purchase of acquisition with ACRA through BizFile+
The company must then lodge the following documents with ACRA:
- A copy of the relevant resolution;
- A notice of purchase or acquisition in the prescribed form with the following particulars:
- The date of the purchase or acquisition;
- The number of shares purchased or acquired;
- The number of shares cancelled;
- The number of shares held as treasury shares;
- The company’s issued share capital before the purchase or acquisition;
- The company’s issued share capital after the purchase or acquisition;
- The amount of consideration paid by the company for the purchase or acquisition of the shares;
- Whether the shares were purchased or acquired out of the profits or the capital of the company;
- Such other particulars as may be required in the prescribed form.
The notice of purchase or acquisition may be lodged through BizFile+ under “Notice of Purchase or Acquisition of Ordinary/Preference Shares/Stocks”. The fee for lodging this document is $0 at the time of writing.
The purchase takes effect when ACRA updates the electronic register of the company’s members.
Cancelling or holding the shares as treasury shares
If the purchased shares are preference shares, the shares will be deemed cancelled immediately after the purchase takes effect.
If the purchased shares are ordinary shares, the shares will be deemed cancelled immediately after the purchase takes effect unless they are held as treasury shares.
In order to hold the purchased shares as treasury shares, the company must be entered in the register as the member holding those shares.
At any time, the company can dispose or cancel any of those treasury shares in any of the following ways by lodging a prescribed notice of cancellation or disposal of treasury shares with ACRA:
- Sell the shares (or any of them) for cash;
- Transfer the shares (or any of them) for the purposes of or pursuant to any share scheme, whether for employees, directors or other persons;
- Transfer the shares (or any of them) as consideration for the acquisition of shares in or assets of another company, or assets of a person;
- Cancel the shares (or any of them); or
- Sell, transfer or otherwise use the treasury shares for such other purposes as the Minister for Finance may by order prescribe.
The notice of cancellation or disposal of treasury shares may be lodged through BizFile+ under “Notice of Cancellation or Disposal of Treasury Shares under S76K”. The fee for lodging this document is $0 at the time of writing.
Procedure for authorising an off-market purchase (on an equal access scheme)
A non-listed company may buy back its own shares if the purchase is made under an equal access scheme authorised in advance by the company in general meeting. This purchase is considered “off-market” because it does not take place on a stock exchange.
An equal access scheme means a scheme that satisfies all the following conditions:
- The offers under the scheme are to be made to every person who holds shares to purchase or acquire the same percentage of their shares;
- All of those persons have a reasonable opportunity to accept the offers made to them;
The terms of all the offers are the same, save for the following:
- Differences in the amount to be paid to each shareholder due to different accrued dividend entitlements;
- Differences in the amount to be paid to each shareholder due to different amounts remaining unpaid on the shares; and
- Differences in the offers introduced solely to ensure that each member is left with a whole number of shares.
Before the general meeting, there must first be a notice specifying the intention to propose the resolution to authorise the said off-market purchase, which specifies:
- How many shares can be acquired
- The maximum purchase price
- When the authority will expire (it must be before the next AGM)
- Where the funds for the purchase will come from and the impact of the buyback on the company’s financial position.
The resolution itself must state the same particulars described above save for the source of funding (i.e. points 1 to 3).
From time to time, the authority may be varied or revoked by the company in general meeting.
Procedure for authorising a selective off-market purchase
If the off-market purchase is made without an equal access scheme, the purchase must be made through an agreement authorised in advance by a special resolution of the company.
In the vote for this special resolution, no votes may be cast by the person whose shares are to be acquired or by any of his/her associated persons. Please note that “person” here includes natural persons and companies (which are “legal” persons).
An “associated person” in this case refers to (in relation to a person):
- The person’s spouse, child or stepchild;
- A subsidiary company;
- Another person who is obliged (whether formally or informally) to act according to the first person’s directions, instructions or wishes; or
- A company that is, or where the majority of directors are, accustomed or obliged to act according to the first person’s directions, instructions or wishes.
There must first be a notice specifying the intention to propose the special resolution, which specifies when the authority will expire (it must be before the next AGM), where the funds for the purchase will come from and the impact of the buyback on the company’s financial position.
The special resolution itself must state the expiry date of the authority referred to in the previous paragraph.
A copy of the agreement (if it is in writing) or a written memorandum of its terms (if it is not in writing) must be available for inspection by the company’s members during the meeting and during the 15 days leading up to the meeting when the special resolution is passed.
The copy of the agreement or memorandum must include the names of the shareholders whose shares are being bought and, if they hold the shares as nominees for other persons, the name of those other persons as well.
From time to time, the authority may be varied or revoked by the company in a special resolution of the company. Again, in the vote for this special resolution, no votes may be cast by the person whose shares are to be acquired or any of his/her associated persons.
Procedure for authorising a contingent purchase contract
A listed or non-listed company may buy back its own shares through a contingent purchase contract authorised in advance by the company in special resolution.
A contingent purchase contract refers to a contract entered into by a company and relating to any of its shares:
- That does not amount to a contract to purchase or acquire those shares; but
- Under which the company may (subject to any condition) become entitled or obliged to purchase or acquire those shares.
There must first be a notice specifying the intention to propose the special resolution to authorise the contingent purchase contract, which specifies when the authority will expire (it must be before the next AGM).
A copy of the contingent purchase contract must be available for inspection by the company’s members during the meeting and during the 15 days leading up to the meeting when the special resolution is passed.
The offer for the contingent purchase contract must be in accordance with all the following conditions:
- The offer must be made to every person who holds shares of the same class in the company;
- For any class of shares, the company must be obliged or entitled to buy the same proportion of shares from every person holding shares of that class; and
- The terms of all offers in respect of each class of shares must be the same.
The company may purchase or acquire shares under a contingent purchase contract from any person regardless of whether the offer to enter into the contract had originally been made to the person.
Is Stamp Duty Payable on Share Buybacks?
Yes, stamp duty is payable at 0.2% of the value of the shares.
For a company that has been incorporated for 18 months or fewer, the value of its shares is the allotment price of the shares if the company does not own any property. If the company owns property, management accounts (a type of financial report for the board and management team) have to be prepared to determine the Net Asset Value (NAV) of the shares.
For a company that has been incorporated for more than 18 months, then the value of its shares is computed based on the NAV of the company (based on the latest statement of accounts). If the company owns any property, the market value of the property, as at the date of the document that is signed when the shares are purchased, should be used in place of the book value (i.e. the value of the property recorded on the company’s balance sheets) if the book value is not reflective of the property’s market value.
If a significant proportion of the company’s assets are residential properties such that the entity is classified as a “property-holding entity”, additional stamp duties (known as “additional conveyance duties”) are payable. Such additional stamp duties could reach up to around 44% of the value of the residential property that was transferred indirectly.
See the IRAS e-Tax Guide on Additional Conveyance Duties for Property-Holding Entities as well as our other article on how stamp duty applies when buying a Singapore company for more information on stamp duties on share transfers.
How Will the Company Fund the Share Buyback?
A share buyback is usually funded using capital and profits.
As mentioned above, if a company lacks the profits to distribute as dividends, it might decide to use its capital to execute a share buyback to reward its shareholders in this other way instead.
In summary, if you manage a private company with excess capital that you wish to return to the company’s shareholders, or if you wish to increase the value of your company’s shares, you may consider executing a share buyback.
As discussed in this article, there are various ways of conducting a share buyback in Singapore. However, if you find these procedures too complicated, we recommend that you consult a corporate services firm for assistance.
A corporate services firm can assist you with matters such as preparing any necessary documents, like the share buyback agreement or the notice specifying an intention to propose a special resolution. The corporate services firm can also assist in filing the notice of cancellation or disposal of treasury shares with ACRA.
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