Share Repurchases and the Protection of
Share repurchases and the protection of shareholders* KATHLEEN VAN DER LINDE**
1 Introduction
From a creditor’s perspective there is not much difference between the payment of a dividend in respect of a share and a payment for the acquisition or repurchase of that share. However, from the point of view of the shareholder a dividend is a return on capital while a repurchase is a return of capital to the vendor shareholder. Share repurchases change the structure of the company’s share capital and consequently also the allocation of rights among shareholders.1 A repurchase combines a distribution to the selling shareholder with an increase in the relative stakes of the non-selling shareholders.2 Alternatively, a repurchase has also been described as a constructive dividend to non-vendors which they use to buy out vendors.3 Dugan explains that repurchases are tripartite in nature and thus pose different types of risks.4 A repurchase comprises (1) a distribution of assets with the attendant risks of asset stripping and debt avoidance, (2) a reorganisation of ownership with the risk of unfair and discriminatory treatment of shareholders, and (3) a transfer of shares which may lead to insider trading and market manipulation.5 W hile repurchases pose risks for the company, its shareholders, creditors and the investing public, this article concerns the protection of shareholders.
The risk faced by shareholders depends on the type of repurchase involved. In a selective repurchase the company acquires shares from one or more specific shareholders only. The reason may be to accommodate a shareholder in a closely held company who upon reaching retirement age wants to withdraw her investment from the company. Getting rid of a troublesome shareholder is another motivation. It stands to reason that the price paid by the company is fundamentally important. If it is too low, the non-selling shareholders will benefit at the expense of the vendor.
This is
1 Introduction
From a creditor’s perspective there is not much difference between the payment of a dividend in respect of a share and a payment for the acquisition or repurchase of that share. However, from the point of view of the shareholder a dividend is a return on capital while a repurchase is a return of capital to the vendor shareholder. Share repurchases change the structure of the company’s share capital and consequently also the allocation of rights among shareholders.1 A repurchase combines a distribution to the selling shareholder with an increase in the relative stakes of the non-selling shareholders.2 Alternatively, a repurchase has also been described as a constructive dividend to non-vendors which they use to buy out vendors.3 Dugan explains that repurchases are tripartite in nature and thus pose different types of risks.4 A repurchase comprises (1) a distribution of assets with the attendant risks of asset stripping and debt avoidance, (2) a reorganisation of ownership with the risk of unfair and discriminatory treatment of shareholders, and (3) a transfer of shares which may lead to insider trading and market manipulation.5 W hile repurchases pose risks for the company, its shareholders, creditors and the investing public, this article concerns the protection of shareholders.
The risk faced by shareholders depends on the type of repurchase involved. In a selective repurchase the company acquires shares from one or more specific shareholders only. The reason may be to accommodate a shareholder in a closely held company who upon reaching retirement age wants to withdraw her investment from the company. Getting rid of a troublesome shareholder is another motivation. It stands to reason that the price paid by the company is fundamentally important. If it is too low, the non-selling shareholders will benefit at the expense of the vendor.
This is