Share Buyback vs. Cancellation

This assignment delves into the financial implications of share buybacks versus share cancellation. It examines the legal framework surrounding both strategies under Australian law, referencing relevant acts and case studies. The case study involves a company considering reducing its share capital by cancelling 'Class A' shares. The analysis concludes that share cancellation is a more favorable option than buyback, requiring shareholder approval and demonstrating fairness to all stakeholders while ensuring the company's solvency.

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Part 1
Issue
From the facts of this case study, the main issue which is highlighted is the possibility of
successful action being raised by the grandchildren of Galli for the dividend not being paid for
this year.
Rule
Section 232 of the Corporations Act, 2001 (Cth) covers the provisions regarding oppressive
conduct or where the conduct is such which can be deemed as unfairly discriminatory of unfairly
prejudicial. Where the conduct under section 232 of this act is established, the court can award
remedies under section 233 of this act as a remedy to the undertaken oppressive conduct (Austlii,
2017). Under section 233 the court can order the company to be wound up, or ask the
management to do a particular task or refrain from doing something, and in this regard, the
company can be asked to purchase or transmit the shares of an individual (Victorian Law Reform
Commission, 2016).
Thomas v H W Thomas Ltd (1984) 1 NZLR 686 is a case which proves to be of help here. The
court held in this case that the adoption of a conservative financial policy and not paying high
dividends could not be deemed as oppressive where the majority have agreed to it and there is a
lack of factors which could point towards unfairness. In this case, the court presented three basic
conditions which were required for making a case of oppressive conduct and for the remedies to
be awarded under the pertinent sections. These three conditions provide that
 The objective with which such conduct is undertaken has to result in such a condition
which can be deemed as oppressive, unfairly discriminatory or unfairly prejudicial;
 There has to be rationale expectations of the parties being left unmet; and
 Lastly, in case the remedies are used, it would be deemed as just, fair and equitable (New
Zealand Official Law Reports, 2017).
Application
The case study given here shows that the awarding the dividends was option for the
management. Hence, there was no compulsion for the company to declare dividends; and on this

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basis, A Class shareholders cannot claim an unjustness or unfairness. Applying the case of
Thomas v H W Thomas Ltd:
 The objective of this was not to harm any shareholder but to purchase a vineyard which
would help the company in expanding their business;
 The expectations of Mario and his siblings are unjust and seeing someone as lazy and
undeserving cannot be rationally cited as oppression.
 If remedies under section 233 are awarded in this case, they would be unfair for the
parties.
Conclusion
In short, owing to the lack of oppression, the claims of grandchildren of Galli would fail.
Part 2
Issue
From the facts of this case study, the main issue which is highlighted is the conditions revolving
around buyback and its benefits for the company.
Rule
Buyback of the shares can be best defined as the company repurchasing its shares (Gibson and
Fraser, 2014). This can be done for various reasons, including increasing the ownership of the
company; taking advantage of the undervalued shares of the company; bringing down the
dilution; and increasing the key financial ratio of the company including the earnings per shares
and return of equity (Kandarpa, 2016).
The ASIC, i.e., the Australian Securities and Investments Commission and the Corporations Act,
2001 cover the legislative requirements for the shares to be brought back. Division 2 covered
under Part 2J.1 of the Corporations Act provides the procedure and the requirements which have
to be undertaken for buyback of the shares (Federal Register of Legislation, 2017). Further,
based on section 257A of this act, the disclosure requirement details are covered and in this
regard, ASIC’s Regulatory Guide 75 covers the valuation requirement based on the report of the
independent expert (ASIC, 2007).

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Application
The case study given here shows that the buyback of shares of the company is a possibility for
the company, which would help it, particularly if the claim of a party gets successful, and it is
shown that the company’s conduct has been unfair, where the court would order the company to
buy back the shares. Apart from this, there are other advantages for the company. So, by
following the requirements stated above, the shares of the company can be bought back and the
requirement of independent expert report can be met based on ASIC’s Regulatory Guide 75.
Conclusion
In short, by adopting the procedure covered under the relevant sections, the buyback of the
shares can be undertaken and the advantages be attained by the company.
Part 3
Issue
From the facts of this case study, the main issue which is highlighted is the option of going
forward with reduction of share capital instead of buyback of shares.
Rule
Capital reduction is that procedure adopted by the company through which the shareholding of
the company is reduced by cancelling out the issued shares based on the legislative requirements.
There are two key benefits of undertaking capital reduction, the first is the increased
shareholders value and the second is the possibility of making the capital structure of the
company better than it had been before (Nanda, 2015). The capital reduction can be undertaken
only when it does not affect the payments of debts of the creditors. Also, as per section 256C of
the Corporations Act, the approval of shareholders has to be undertaken. There are certain other
manners in which capital reduction can be undertaken and this includes the share buy-back or the
redemption of the redeemable preference shares (ASIC, 2014).
Application
The case study given here shows that the company should go ahead and cancels the shares of
“class A” but for this, they would be required to take an approval of the shareholders of the
company. They would have to be showed that this proposed capital reduction is fair for every

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stakeholder and that the capacity of the company in repaying the debts of the company would not
be hampered.
Conclusion
In short, the company should go forward with cancellation of shares of “A class” instead of
buying them back.

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References
ASIC. (2007) Share buy-backs. [Online] ASIC. Available from:
http://download.asic.gov.au/media/1240127/rg110.pdf [Accessed on: 01/10/17]
ASIC. (2014) Reduction in share capital. [Online] ASIC. Available from: http://asic.gov.au/for-
business/running-a-company/shares/reduction-in-share-capital/ [Accessed on: 01/10/17]
Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from:
http://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions
[Accessed on: 01/10/17]
Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne, Pearson Education
Australia.
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of
Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed
on: 01/10/17]
Kandarpa, K. (2016) What is the Purpose of a Share Buyback and How can Shareholders Benefit
from it?. [Online] Wise Owl. Available from: https://www.wise-owl.com/investment-
education/what-is-the-purpose-of-a-share-buyback-and-how-can-shareholders-benefit-from-it
[Accessed on: 01/10/17]
Nanda, D.S. (2015) Reduction in share capital: Analysis. [Online] Corporate Law Reporter.
Available from: http://corporatelawreporter.com/2015/02/23/reduction-share-capital-analysis/
[Accessed on: 01/10/17]
New Zealand Official Law Reports. (2017) Thomas v H W Thomas Ltd - [1984] 1 NZLR 686.
[Online] New Zealand Official Law Reports. Available from: http://www.lawreports.nz/thomas-
v-h-w-thomas-ltd-1984-1-nzlr-686/ [Accessed on: 01/10/17]
Victorian Law Reform Commission. (2016) The oppression remedy in the Corporations Act.
[Online] Victorian Law Reform Commission. Available from:

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http://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act#footnote-
135972-53-backlink [Accessed on: 01/10/17]