n Business Tax and Company Law Quarterly - Share buy-backs under the Companies Acts - The devil is in the detail!

Volume 2, Issue 1
  • ISSN : 2219-1585


Since 1999 South African companies have been permitted to acquire their own shares from shareholders by virtue of an amendment to section 85 of the current Companies Act 61 of 1973. Such acquisitions, described in this article as 'share buy-backs', have become increasingly commonplace and play an important role in company re-organisations, including black empowerment and management buy-out transactions. In the case of listed companies they may have the effect of supporting the company's share market price by reducing the number of issued shares and increasing the net asset value of the remaining issued shares. This article explores first the statutory requirements for a share buy-back under the current Act and examines the provisions of a number of related provisions of the Act that interact with, or facilitate, the operation of section 85. This is followed by a discussion of the tax consequences of share buy-backs under the current provisions of the Income Tax Act, which will have similar application to share buy-backs under the provisions of the new Companies Act 71 of 2008, when it comes into force.The article further critically analyses the provisions of the new Companies Act relating to share buy-backs and their requirements. It examines the extent to which they depart from well-established principles already embodied in the current Act. The article also deals with amendments to the new Act as proposed in the Companies Amendment Bill 40 of 2010, and which are designed to rectify some of the serious flaws in the new Act as enacted. The key requirements of sections 46 and 48 of the new Act are identified, as are other related provisions, including the solvency and liquidity test described in section 4, which is pivotal to the validity of a share buy-back. The article assesses the flaws in the buy-back provisions as enacted, as well as the corrective effect of the proposed amendments in the draft Bill, and calls for the process of revision to be taken further before the new Companies legislation is finally brought into operation.

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