Question

Goodtimes Ltd has had a very successful trading period. The directors decide that the profits should be used to offer to purchase back some of their shares held by the members. The directors wish to undertake two transactions:

1. purchase 12% of the ordinary shares held by Jasline
2. offer all shareholders the opportunity to sell 8% of their ordinary shares to company.

REQUIRED:

1. In terms of s256 A, describe the obligations of the directors in terms of whether the Corporations Act allows the directors to undertake their plans (3 mark)
2. name the type of buy-back relevant to each of the above and briefly detail the procedures to be followed (3 mark).

Answer 1

Section 256A of the corporation acts states the rules to be followed by a company for reductions in share capital and for share buy-backs. The rules are designed to protect the interests of shareholders and creditors by:

(a) addressing the risk of these transactions leading to the company's insolvency.

(b) seeking to ensure fairness between the company's shareholders.

(c) requiring the company to disclose all material information.

In the given case the company is offering different offerings to the Jasline and all other shareholders.

While Jasline is given the opportunity to sell his/her 12% of the shares, others are offer only 8% which triggers the sub part (b) of section 256A of the corporation act.

Buy Back of shares from Jasline will be considered as Selective Reduction while Buy back from other shareholders will be considered as Equal Reduction.

Obligations Regarding Selective Reduction, it must be approved by either:

(a) a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or

(b) a resolution agreed to, at a general meeting, by all ordinary shareholders.

Obligations Regarding Equal Reduction, it must be approved by by a resolution passed at a general meeting of the company.

The directors shall take the approvals as required by the corporation act and then move ahead for the buy back.