Many companies may face the challenge of removing shareholders from a company. There are two options, being cancelling the shares, or undertaking a buy-back of the shares. The process of resolutions would depend on the constitution of the company (and the relevant replaceable rules), and how many directors there are.
Shares cannot be cancelled unless the reason for the cancellation is covered under the Corporations Act 2001(Cth). One of these options is a Court order under section 1325A of the Act. However, forfeited shares can be cancelled under section 258D which states that ‘a company may, by resolution passed at a general meeting, cancel shares that have been forfeited under the terms on which the shares are on issue.’ A forfeited share is a share in which the buyer has failed to meet the purchase requirements. After the resolution, the next process is to lodge a change to company details within one month after the cancellation of shares.
Alternatively, the company can buy back the shares pursuant to section 257A of the Corporations Act which states that a company may buy back its own shares if the buy-back does not materially prejudice the company’s ability to pay its creditors, andthe company follows the procedures laid down in this Division. It must be noted that if a company has a constitution, it may include provisions precluding the company buying back its own shares, or impose restrictions on a company buying back its own shares.
A ‘buy back’ involves a company reclaiming issued shares by purchasing them from existing members. A notification of share buy-back details must be lodged with ASIC before the notice of meeting is sent to members. ASIC must be given at least 14 days notice before a resolution is passed or a buy-back agreement is entered into. Notice of Intention to carry out a share buy-back must be lodged with ASIC where the company wants to have less than 14 days between lodging a form or entering into the buy-back agreement. Lastly, a change to company details must be lodged with ASIC within one month.
The resolutions can be regular resolutions, however a selective buy-back under section 257D of the Corporations Act requires a special or unanimous resolution. A selective buy-back occurs where identical offers are not made to every shareholder, for example, if offers are made to only some of the shareholders in the company. It must be noted that buying back shares can prove a difficult process where the relevant shareholder is hostile. They may take other steps to prevent the buyback process, including siding with other shareholders, invoking protections as minority shareholders.
Companies should be aware of the provisions of the Corporations Act concerning removing shareholders from a company, being cancelling shares or buying back shares. For more information about corporations law check out our Resource Centre! If this article raises any legal issues for you or your corporation please get in touch today!