The Advantages of Share-Buy Back for Debt-Restructured Companies

The Provisions of Share Buy Backs for Companies have been provided for under section 67A of the Companies Act. Such Proposal by the Company shall require the sanction and/or sanction of the relevant authorities and shareholders of the Company. An EGM has to be held to sanction such move. Section 67A allows a Company to purchase the Companies’ Shares from the market of up to 10% of the Total Share Capital of the Company currently issued subject to no contravention to the 33% ownership by any Shareholder as required by the SE.

• The Shares purchased and/or acquired by the Company required to be treated in two ways namely, to be treated as treasury shares deposited under a separate account and/or to cancel the shares and/or both methods can be adopted.

There are advantages in Share Buy Back for the Company based on the following reasons:

(a) to prevent the shares traded to be speculated and to stabilize undervalued shares of the Company; and.
(b) if the shares are declared good dividend income, it can be treated as good income and/or investment by the Company to purchase their own shares instead of venturing into unwanted territory particularly in current economy environment; and
(c) For the Company to plan their desired capital structure (to be explained below).

• It is normal for PN4 or other distressed companies to restructure their loans and part of the restructure propositions would  entail rights issues and/or irredeemable convertible loans and/or some form of enlargement of share capital after conversation of the debts owing to creditors into ordinary shares or other instruments in the Company.

• Although such restructuring may enhance the Earning per share (EPS) of the Company by virtue of the fact that the debt and/or liability of the Company has been reduced and/or restructured via the issuance and/or enlargement of share capital of the Company. In some occasions, the shareholders’ interest and percentage of equity in the Company by the Principal owners may have been diluted.

• Therefore, it would be tactically advantageous for Companies who have restructured their debts as stated above to propose the proposition for share buy back in accordance to Section 67A of the Companies Act. Normally, it is common for companies to have some profits retained from various fund raising exercise and/or via debt restructuring exercise whereby the Companies normally termed them as ‘working capital’ to enter and/or maintain existing business operations. The Company may utilize the monies to buy back their own shares. Shares Buy Back can allow the Company to reduce total share capital of the Company and enhance the Shareholders position and/or controlling stake in the Company without the need to use their own money to do so.

• It is particularly attractive to propose for share buy back at current depressed market condition as very many companies are trading at below the value of their NTA and/or their original listing value. It is a ‘cheap’ method to enhance and/or strengthen the shareholder’s position.

• The shareholders’ position can be strengthen provided the shares are subsequently cancelled by the Company and the share capital of the Company will reduce accordingly.

• Normally, Retail Investors view Share Buy Backs by Listed Companies as a favorable steps or move as it is common view by many that only if the Principal Shareholders are confident with their own company would they pursue to buy back their own company shares. However, it is important to note the disadvantages particularly for companies which issues low dividend to shareholders (as most companies in KLSE don’t award minority shareholders with high dividends, unlike other countries) and utilizing the retain profits of the Company to invest into their own shares may not be a favorable move as there could be other better investment options to generate better income for the company and greater maximization of the company’s  fund than the low yield provided by the company’s issuance of dividend.

• There could also be situation whereby the Company has pledged a block of shares to some financial institutions at certain price and there could be ‘margin call’ if the share price of the stocks in the said company fell below certain price and it is important for the Company to maintain the particular share price to ensure that the Banks don’t force sell the shares and/or to require the Company to ‘top’ up the difference in consideration of the loan that has been disburse to them. Therefore, it is a good alternative to explore for the Company to opt for share buy back using Company Funds to ensure stability of the share price particularly in current market environment.

• Mulpha Berhad who has its loans restructure and coupled with issuance of new shares to creditors has been actively buying back their own shares and this is one good counter in the opinion of the writer that could mean that the Company may opt to cancel the said shares to ensure that the enlargement of the share capital post-restructuring can be reduce to a reasonable level.

• It is important to note that though the share capital may have been reduced if the shares purchased is subsequently cancelled, it doesn’t necessary mean that the EPS for the company may increased as purchase of the own company shares may not yield good dividend as stated above and may even reduced the EPS of the Company!

This article is by K.T.Tan – www.mylegalweb.net