The Concept of a Share Buyback Under the Companies Act

A share buyback essentially occurs when a company acquires some of its own shares through means other than by subscription. Such acquired shares are colloquially referred to as treasury shares and allow for flexibility with regards to the company’s capital structure since the sale thereof does not constitute an allotment or issue of shares and thus the restrictions imposed thereon do not apply.¹ The procedure which a company must necessarily undertake in order to validly buy back its own shares is outlined in Articles 106 and 107 of the Companies Act (Chapter 386 of the Laws of Malta) (the “Companies Act”) which are heavily modelled on Article 19 of the Second EC Company Law Directive. However, the Maltese provisions apply to both public and private companies, unlike Article 19 which only contemplates share buybacks by public companies.

Conditions in which a company may acquire its own shares (Article 106)

Firstly, a company may only commence the buyback procedure if provision has been made in its Memorandum & Articles of Association (“M&A”) authorising the company to acquire its own shares. Another prerequisite is that the company’s net assets, as set out in the annual accounts of its last accounting period, are not or would not become less than the company’s issued share capital together with any non-distributable reserves following the acquisition. Moreover, a buyback must necessarily be made from the proceeds of a fresh issue of shares or out of distributable profit.

Provided that the above conditions are met, shareholder authorisation must then be obtained by means of an extraordinary resolution taken in accordance with the provisions of the Companies Act, which shall also include the terms of the buyback namely:

• The number of shares to be acquired, the nominal value of which, in addition to any other of its own shares which have already been acquired by the company, may not exceed fifty percent of the issued share capital. It is also stipulated by the Companies Act that any shares bought back by the company must be fully paid up.
• The duration of the authorisation to acquire the shares which may not exceed eighteen months; and
• The maximum and minimum consideration where the acquisition is one for a valuable consideration.

Upon completion, a copy of the said resolution must then be delivered to the Malta Business Registry for registration. However, the law fails to provide a time limit for the filing of such resolution.² The preparation and filing of this resolution is not required where the buyback is necessary to prevent serious and imminent harm to the company. This dispensation derives from German law and contemplates situations such as when the acquisition is necessary to prevent a persistent depreciation in the price of the company’s shares.³ Moreover, the preparation of the resolution is also not necessary when the shares are acquired with the intention of them being distributed to the employees of the company, its parent or of any of its subsidiary undertakings. Provided that in such case, the distribution shall take place within a year of the acquisition.

Acquisition of own shares by a company without application of article 106 (Article 107)

The Companies Act highlights specific scenarios wherein a company need not comply with the above requisites outlined in Article 106. Such list contemplates scenarios wherein the company’s own shares are:

• forfeited or surrendered in accordance with Article 112 of the Companies Act⁴;
• acquired in any procedure for the conversion, amalgamation, or division of companies:
• acquired in any procedure for the change of status of a company; or
• acquired by the company pursuant to an order made by the Court for the repurchase of shares held by dissenting shareholders, including an order made in terms of Article 402(3)(d).

Nonetheless in the above circumstances, the company must dispose of the acquired shares within thirty months of their acquisition. If this is not done and the value of the shares exceeds 10% of the issued share capital, the said shares must be cancelled within the following six months by means of an extraordinary resolution and in compliance with Article 83. If the company fails to do so, any member or director has a right to apply to the court for an order for the cancellation thereof.

Where a creditor objects to the cancellation of the treasury shares which were acquired for a valuable consideration, provided that good cause is shown, the court shall order that sufficient security is given to the said creditor. Where this security is not immediately available, it shall order that sufficient security be given thereto when this becomes available and until so, there shall be no distribution of dividend to the shareholders of the company.

Other scenarios wherein the requirements of Article 106 do not apply include when the shares are:

• acquired in the course of a reduction of the company’s issued share capital;
• fully paid up and acquired by an investment company with fixed share capital or by another company forming part of the same group at the member’s request. Provided that such acquisitions shall not have the effect of reducing the company’s net assets below the amount of the issued share capital together with any reserves which are undistributable by law; or
• acquired by the company during the redemption of preference shares.

It is important to note that in any case, the company may never become the sole holder of its ordinary shares as a result of a share buyback. This stems from the general rule under Maltese law which required a company to be composed of at least two members. Non-compliance with such rule may result in the dissolution and winding-up of the company as well as personal liability imposed on the remaining member with the application of the principle of the lifting of the corporate veil.⁵

Article 107 also provides that a company may also acquire any of its own shares without complying with the provisions of Article 106 where the shares are the subject of an application which is revoked in accordance with the provisions of Article 100. However, Article 100 was deleted by Act V. 2020.25. Article 100 previously dealt with the revocability of an application for shares or debentures. Accordingly, the application of such provision is now called into question.

Shares acquired or held in contravention of Articles 106 and 107 (Article 108)

The Companies Act stipulates that treasury shares held or acquired by a company for a valuable consideration and in contravention of the rules mentioned above, must be cancelled in accordance with Article 83 and within six months of the expiration of a one-year period from their acquisition wherein the company failed to dispose thereof.

Where the company fails to comply with the prescribed time limit, any member or director shall have the right to apply to the court for the cancellation of the said shares. Where a creditor of the company has objected to the cancellation of the shares, the court may not disallow their cancellation but may order for sufficient security to be given to the said creditor provided that good cause is shown thereby. If sufficient security is not immediately available, the court may order the provision thereof as soon as this becomes available and in the meantime, there shall be no distribution of dividend by the company.

In such scenario where the company holds or acquires shares in contravention of Articles 106 and 107, the law does not provide any sanction other than the mentioned obligation to cancel the shares and the lack thereof could thus lead to abuse.⁶

Conditions for acquisition by a company of its own shares where permitted by law (Article 109)

This article of the law stipulates that during the time where the company holds any of its own shares, these shall carry no voting right regardless of any provision made in the company’s M&A. Moreover, as a capital maintenance safeguard,⁷ if the company is to include the treasury shares amongst its assets within the balance sheet of the accounts, then an undistributable reserve of the same amount must also be included therein.

Share buy backs in practise

Share buybacks are commonly used in both private and public companies. One example of a share buyback in practise is that undertaken by Catena Media p.l.c. which purchased a number of its own shares in 2022 on Nasdaq Stockholm (formerly known as the Stockholm Stock Exchange) in accordance with the authorisation provided by means of an extraordinary general meeting of its shareholders. The directors of the Maltese public company felt that this would enhance flexibility with regards to the distribution of capital to its shareholders as well as promote efficient use of its capital.⁸

Similarly, the directors of Kindred Group plc, a public company in Malta, had also received authorisation at an extraordinary general meeting in May of this year to buyback a number of the company’s own shares. It was stipulated that the shares must be acquired between May and June 2023 thus satisfying the eighteen-month authorisation period. Furthermore, the price for which the shares are purchased must have necessarily fallen between the recorded interval, this being the interval between the lowest and highest selling price on the stock exchange. The repurchases were to be made exclusively on Nasdaq Stockholm and the intention of the Board following the repurchases was to cancel the acquired shares.⁹