01 December 2012

Redemption of, and purchase of its own, shares by a Jersey company

Redeemable shares and how they may be redeemed, and the purchase of its own shares, by a Jersey company, have been within the Companies (Jersey) Law 1991 since enactment, but the Companies (Amendment No. 8) (Jersey) Law 2006 and the Companies (Amendment No. 9) (Jersey) Law 2008 extensively reconfigured the approach to creditor (and shareholder) protection.

Purchase of own shares is also spoken of as repurchase, or "buyback". Redemption means repurchase (or buyback): the difference is that redemption only applies to redeemable shares, redeemable shares being temporary capital, issued with the expectation or intent that they be redeemed. Redeemable shares can also be repurchased. Redemption and repurchase of shares are both returns of capital, and therefore subject to the underlying principle of maintenance of capital, for the protection of creditors, inseparable from the idea of limited liability. 

Under the previous regime the Law was prescriptive on the sources that could be used for redemption (or purchase of own shares), and distinguished – for non "open-ended investment companies" ("OEICs") – between, in the case of par value shares, payment of (a) the nominal value of the shares redeemed (or purchased) and (b) the premium paid. Capital representing nominal value could not be used to redeem (or purchase) par value shares, although all of the 'stated capital account' could be used for no par value shares (which one could construe as treating all of the stated capital as share premium); but in the case of both par and non par value companies a special resolution of shareholders was needed for the use of unrealised profits for redemption (or purchase).

This element of shareholder protection has been dispensed with, and the protection is now focused on creditors, by the applicable solvency test(s) referred to below, which evolved and developed under the above Amendment Laws. In the case of OEIC companies, no distinction was made between par and no par value companies, and redemption (or repurchase) could not be at a price greater than NAV. No shareholder approvals were required, only an objective solvency test for the directors. 

Share buybacks to create a "more efficient" balance sheet, that is one more reliant on debt, are now less popular.

A. Statutory regime under the Companies (Jersey) Law 1991 as amended (the "Companies Law")

I. Redemption

 (i) Redeemable shares:

framework Articles of association must allow the issue of redeemable shares, or the conversion of non-redeemable shares into redeemable shares. Only shares in a limited company can be redeemable shares; and a company cannot have only redeemable shares in issue (for that would mean that all its capital was temporary). The Companies Law contemplates redemption of redeemable shares "in accordance with their terms" or at the option of the company or the shareholder.

Only fully paid up shares may be redeemed.

 (ii) Redeemable shares:

 sources, solvency and authorisations The Companies Law has different regimes for

(a) OEICs and

(b) all other companies. No distinction is made between public and private companies.

Redeemable shares of OEICs and non-OEICs can be redeemed "from any source". This means that redemption can be made not only from distributable reserves, extending to capital.

(a) Non-OEIC companies

The Companies Law provides that redeemable shares are not capable of being redeemed unless all the directors who authorise the redemption make a solvency statement in the stipulated form, being essentially a double cash flow/"commercial" solvency test, to be satisfied in the opinion of the directors, applied (a) immediately following the proposed redemption payment date and (b) over a 12 month "look forward" period immediately following the proposed redemption payment date.

Normally the authorising directors will be those present at the relevant board meeting, but if any other director participates in the authorisation he/she (or it, if a corporate director) must join in the solvency statement. The solvency statement is commonly made in writing as a separate document accompanying the board minutes; it would form part of the one document if the directors signed written resolutions; the Companies Law does not require that the statement be made in writing; it can be set out as part of the minutes, i.e. as orally made by the directors.

Comparing the precise wording of the Companies Law here with the comparable wording on authorising dividends and other distributions, it is apparent that the solvency statement does not have to be made before the board resolutions are passed, but only before the redemption is made. This must be right, for the one board authorisation of redemption could look to a series of redemptions, as the case may be happening some time after the board authorisation.

The Companies Law does not say that a (non-OEIC) redemption is vitiated if the opinion of the directors is not made on reasonable grounds (only that a director who makes such statement without reasonable grounds for it is guilty of an offence).

It is a nice question whether any redemption made without satisfying the solvency statement requirement, and the effects of that purported redemption, must be void as unlawful, given that the Companies Law states that the shares are not capable of being redeemed without it. There is no provision comparable to the provision on distributions that a shareholder is liable to repay an unlawful distribution if (that is, only if) he knows or has reasonable grounds for believing that it was made in contravention of the Companies Law, only that where a company (not being an OEIC) in creditors' winding up has within 12 months before that winding up made a payment in redemption or (re)purchase of shares, and that (aa) the payment was not made lawfully, (bb) there is a shortfall in the company's assets and (cc) the shareholder whose shares were redeemed or repurchased knew, or, in terms, ought to have known, that the company would not satisfy a cash flow and balance sheet solvency test immediately after the relevant payment was made: in that case the shareholder can be required to contribute the redemption/repurchase amount.

The Companies Law does not say that a (non-OEIC) redemption or repayment is unlawful if the solvency statement is not properly made, thus this potential liability of a shareholder to contribute must only arise if for example there is no solvency statement, not if there is one but it was not made on reasonable grounds.

(b) OEIC companies

Redeemable shares of OEICs do not require a formal solvency statement to permit their redemption, but are not capable of being redeemed unless the authorising directors reasonably believe that the cash flow solvency test will be met immediately following the redemption payment; and unless the shares – which as above must be fully paid up – are redeemed at a price not exceeding NAV. Note that the solvency test here is objective in a way that it is not for non-OEIC companies. These provisions have changed very little under the Amendments No. 8 and No. 9.

(iii) Payment and cancellation

The Companies Law refers only to 'payment' on redemption (or purchase), but we consider that it is not a necessary inference that that Law does not allow the price payable on redemption or purchase to be satisfied by transfer of non-cash assets. The Companies Law provisions on distributions do expressly contemplate non-cash distributions. A proposed amendment to the Companies Law will put this question beyond doubt.

The general statutory rule is that a company shall not, except where the shares are uncertificated/dematerialised and are handled within the regime set out in the Companies (Uncertificated Securities) (Jersey) Order 1999, register a transfer of shares unless an instrument of transfer in writing has been delivered to it, but, except in the case where shares redeemed (or purchased) are to be held as treasury shares, there is here no transfer to complete by registration of the transferee as the new owner. 

Shares that are redeemed are, unless they are immediately to be held as treasury shares, automatically cancelled. Prior to the introduction of treasury shares, this was self-evident, but amendment to the Companies Law has, at the time of that introduction, made an express statement of this.

If shares of a par value company are redeemed, the amount of the company's (issued) share capital is diminished by the nominal value of those shares, unless they are held in treasury.

If treasury shares are cancelled, then at that point the issued share capital is diminished by the nominal value.

(iv) Retention as treasury shares

Shares that have been redeemed or bought back by a company can, if the conditions are satisfied, be held as treasury shares. Previously all such shares were automatically cancelled.

For treasury shares of a Jersey company, please see our other briefing note.

II. Purchase of own shares

(i) General provision

The above provisions governing redemption of shares also apply to purchase of its own shares by a company.

(ii) Specific provisions

These specific provisions do not apply to an OEIC: thus for an OEIC it is indifferent whether the operation is a redemption or a (re)purchase of shares.

Any purchase of own shares must be sanctioned by a special resolution, except where the purchase is by a wholly-owned subsidiary. The Law does not say that this special resolution must precede the purchase (but it would of course be imprudent to effect the buyback without having secured the special resolution).

If the shares are not to be purchased on a stock exchange (thus where the shares are unlisted, or although listed, the purchase is to be done as an off-market transaction) then it is a condition that they be purchased under a contract previously approved by an ordinary resolution; and the shares to be repurchased are disenfranchised on the above special, and this ordinary, resolution.

If the shares are to be purchased on a stock exchange, the special resolution must specify the maximum number of shares to be purchased, the maximum and minimum prices, and the date (not more than 18 months later) on which the authority to purchase is to expire. A proposed amendment to the Companies Law will extend into this period to five years.

Note that an on-market purchase does not exclude a contract to purchase; or, conversely, the existence of a contract does not in itself necessarily mean that the purchase is not an on-market purchase. Thus a repurchase by tender offer can see the relevant shareholders tendering their shares to the company's broker, followed (immediately) by the company repurchasing the shares from the broker, under an on-market transaction, pursuant to a contract between broker and company put in place before the tender offer is set in motion

B. No reduction of capital

The Companies Law now expressly provides that a redemption or repurchase of shares under the above provisions is not a reduction of capital for the purposes of that part of the Law which explicitly deals with reduction of capital.

C. Depositary receipts

A proposed amendment to the Companies Law would include depositary receipts in the on-market purchase mechanism.