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The purchase of own shares: a technique with a broad, strategic range

Umicore, Barco, D’Ieteren… These are just a few examples of companies currently purchasing their own shares. According to a recent study by De Tijd, Belgian listed companies purchased their own shares for no less than 3 billion euros in 2018. It is considered to be an international trend.

Nevertheless, this instrument can also provide several services to smaller and non-listed companies. In this article, Deminor provides a brief description with an overview of the applicable rules and motives for the purchase of own shares.

Own shares are shares that a company owns in itself. The repurchase can therefore simply be described as the purchase and ownership by the company of shares it has issued itself.

Since the capital structure of the company is affected by the purchase of its own shares, this act is subject to very strict legal and fiscal regulations. Consequently, it is very important to strictly comply with these rules: a purchase is only allowed if the legal conditions are respected, and this under penalty of nullity.

 

 

Legal conditions

The Belgian Company Code has been extensively regulating  the purchase of own shares in the NV/SA, the Comm. VA/SCA and the BVBA/SPRL. For the Limited Partnership (CVBA/SCRL and CVOA/SCRI) it is not possible to hold any of its own shares.

The new Code of Companies and Associations simplifies the conditions for the purchase of own shares.

In the new Code of Companies and Associations (‘CCA’), the rules regarding the purchase of own shares mainly coincide with the existing rules, although the Limited Partnership disappears – but have been simplified. The acquisition of own shares is subject to the following legal conditions:

  • The general meeting must always give its prior approval to buy back the company’s own shares. The decision must be taken by a special majority of 75 % of the votes, which previously required a majority of 80 %.
  • The shares that are eligible for buyback must be fully paid-in.
  • The amount used for the repurchase of the shares must be distributable. Following the CCA’s entry into force, this requires a balance and liquidity test.
  • The repurchase offer must be addressed to all types of shareholders and must be made under the same conditions for each type of securities, in order to ensure equal treatment of shareholders.
  • An ‘unavailable reserve’ equal to the amount used for the distribution must be created for as long as the shares are held by the company.

The main modification is that, under the Companies Code, the purchase of own shares was limited to a maximum of 20 % of the shares representing the share capital. The CCA abolishes the minimum capital in the BV/SRL and provides more flexibility for the NV/SA, thus removing the 20 % limit for both the BV/SRL and the NV/SA. The amount of shares that can be repurchased and the price range are determined by the general meeting in the CCA, although it is possible to set a statutory maximum percentage. In the BV/SRL, there is no longer an obligation to dispose of the shares within two years, but only a right to dispose them.

 

 

Fiscal impact

In addition to the company law aspects, the purchase of own shares also has special tax consequences.

When a company purchases its own shares, in principle a dividend is included in the corporate income tax base. This dividend is equal to the difference between the acquisition price and the paid-in capital represented by the acquired shares, the so-called ‘purchase bonus’. This amount will be subject to 30 % withholding tax, which is equal to the rate for ordinary dividends.

The purchase of own shares is fiscally more beneficial than the payment of a dividend.

However, the purchase of own shares remains fiscally more beneficial than an ordinary dividend payment. The compensation for the paid-in capital remains tax-free. In addition, there only is an assimilation with a  dividend and thus the payment of a withholding tax when the repurchased shares are cancelled, disposed of with a loss in value, when a depreciation is booked, or when the company is liquidated.

 

Motives

Consequently, a company has the choice of holding, reselling or destroying the purchased shares in its share portfolio. A company’s motives for buying back its own shares can therefore be very different.

For example, the purchase of own shares can be a useful instrument to buy out shareholders who want (or have to) leave the ship. Think, for example, of the situation in which the other shareholders do not have sufficient financial resources and no suitable third party offers itself. The same solution can be offered when a partner passes away. In this case, the shares can be held in the company’s assets.

If the shares are destroyed, the total number of shares in the company decreases. As a result, the profit has to be divided among fewer shares, which increases the value per share. In theory, this creates an additional, tax-free shareholder value. In this case, the withholding tax has to be paid.

This way it is also possible to correct or support the price of a share in listed companies by means of a purchasing programme. By purchasing, the company signals that it considers its own share price to be undervalued. It is also used to offer shares for sale to staff or key figures within the company.

Shareholders should pay close attention and thoroughly examine the conditions attached to the purchase of own shares. Because of the strict legal rules and special tax implications, it is always advisable to be thoroughly informed before starting a purchasing procedure.

Are you considering purchasing your own shares as a company? Or are you a shareholder of a company that wishes to purchase its own shares?

Please contact Lien Verhasselt lien.verhasselt@deminor.com for more information.

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