Question 2

The consultans Amajuba (Pty)Ltd have asked for our opinion with regards to them
wanting to declare dividends to all share holders and to buy back some of their
shares which were previously issued/sold to raise their equity instead of their debt.
Our opinion is as follows
Share buy backs can have a significant negative impact on non-targeted
shareholders. Section 48,114,115 and 164 of the Camponies Act 71 of 2008 impose
strict procedual requirements for share buy backs.
Section 48(8)(b) of the companies Act 71 of 2008 states that a decision made by the
board of directors in the company to buy back its shares is subject to the
requirements of section 114 and 115 of the companies Act . If considered together
with other transactions in a combined series of transactions ,it involves the
company’s purchase of more than 5% of the issued shares of any particular class of
the company’s shares.Two important questions have to be asked since the
commencement of the companies act
1 is such a buy back safe or is just a procedure requirements
2 Are appraisal rights triggered when the company proposes such
Take a look in the recent judgement in the Capital Appreciation Ltd v First National
Nominees (I didn’t know if I should write everything about it or not but here it
goes)the judgement has infact given clarity as to whether a company’s acquisition of
more than 5%of its issued shares is in fact a scheme, or merely a subject to the
procedural requirements ? But the biggest question is “Are appraisal rights triggered
when the company proposes such a buy back?”
Before buying back their shares they should have the following Legal considerations
1) Solvency and Liquidity- buy backs are defined as distributions in terms of the
Companies Act , therefore it requires the board to be satisfied that the
company’s assets are either equal to or exceed its liabilities prior to the buy
back taking place.
2) Shareholder Impact- If the buy backs involves the acquisition of more than
5%of the total shares within any class of it’s shares, sections 114 and 115 of
the Companies Act need to be complied with.
3) Capital Gains Tax- share buy backs transactions in some circumstances may
be subject to CGT or may be deemed to be “Dividend” and as a result trigger
dividends tax.
The company and the shareholders need to enter into a agreement in terms of which
the company agrees to buy back shares held and owned by shareholders and will
specify inter alia , purchase, payment method or the schedule and any
representations by both the parties thereto.
The benefits of share buy backs are Increasing shareholder value by reducing the
number of outstanding shares,Flexibility in terms of the timing and amount of shares
to be bought back. However buying back shares has risks like, Reducing
lequidity,Misuse of funds
In conclusion buying back shares is a corporate finance strategy that can provide
businesses with a variety of benefits, including returning capital to shareholders and
boosting share prices, However businesses should understand the importance of
complying with the legal requirements for share buy backs , including getting a
shareholder approval,conducting a solvency and liquidity test and reporting the buy
back on the annual finencial statements. By understanding the risks and benefits for
buying back shares ,the company can make an informed decision about whether
their plan is appropriate for their financial goals and objectives, and make sure that
they use this strategy in a effective and responsible manner.