LEGALIMPLICATIONSOFSHAREBUYBACKFinal.docx

LEGALIMPLICATIONSOFSHAREBUYBACKFinal.docx

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LEGALIMPLICATIONSOFSHAREBUYBACKFinal

LEGALIMPLICATIONSOFSHAREBUYBACKS

By

ChiefAnthonyI.IdigbeSAN*

“Whencompanieswithoutstandingbusinessesandcomfortablefinancialpositionsfindtheirsharessellingfarbelowintrinsicvalueinthemarketplace,noalternativeactioncanbenefitshareholdersassurelyasrepurchases”

WarrenBuffett

GentlemenoftheFourthEstate,ImuststraightwayconfessmydelightandhonourtobeinyourmidsttodaytodiscussthetopicIhavebeenaskedtohandle.

ThisisbecausewhenIreceivedtheinvitationletterfromtheorganizersofthisprogramme,Iwassurprisedtoseethatitwasissuedbymembersoftheprintandelectronicmediareportingintheareaofcapitalmarketwhohadcometogetherwithagoalofdischargingtheirdutiesinamostresponsiblemannerintermsoffinancialjournalism.Itismostheartwarmingtoseesuchfocusedintenttoenhancedprofessionalismbasedonaproperunderstandingofthearduoustechnicalfinancial/legalinformationthattheyreporton.YourworkisultimatelyconsumedbymembersofthegeneralpublicandinparticularstakeholdersintheNigerianCapitalMarketandformsthecheapestandbroadestwayofinformingtheirinvestmentdecisions.Itistothecreditofyourorganization,thatyoustrivetotrainyourmemberstostayabreastofthelatestdevelopmentsintheNigerianCapitalmarketandevenoutsidetheshoresofNigeria.

ThenewmoredetailedSECrulesregulatingsharebuybacksisaninterestingdevelopmentfortheNigerianCompanylawandpracticeaswellasawelcomedevelopmentaimedatcurbingsharppracticesofdirectorsandcontrollingshareholdersusingcompany’sresourcestoentrenchtheircontroloverthecompany.

ThetraditionalconceptionunderNigerianCompanyLawisthatcompaniesshouldnotbeseentobuytheirownshares.Itwasfeltthattherewasaninherentconflictinsuchatransaction.However,bestpracticeshavebeenchangingworldwideinrelationtotheconceptofsharebuyback.Thequestionwouldnowseemtobetowhatextentisitdesirabletohavegovernmentinterventionbywayofregulationratherthanabsoluteprohibition.

Therelevantruleforourreviewhereisrule109Bformerlydescribedasrelatingto“acquisitionofownsharesbycompanies”andnowmeanttoread“rulesrelatingtosharebuy-back”.Obviouslyhere,themodificationofthetitleofthisparticularRulehasnootherrolethantoalignsametothespecifictechnicalterm/jargonusedininternationalbestpracticeoffinancialandcapitalmarketcircles.Hence,theterms“buybacks”,“stockbuybacks”,“sharerepurchase”areclearlyandinterchangeablyuseddependingonthejurisdictions

BeforeweproceedtoanalyzetheruleslaidoutbytheNigerianSEC,itispertinenttohaveafullgraspoftheconceptofsharebuybackbydefiningthemeaningandscopethereof,itsroleintermsofcapitalallocation,motivationforuseofsharebuybacksbycompaniesandimperativeforregulationofsharebuybacks.

WeshallthereafterexaminetheregulatoryframeworkcreatedbySECwithrespecttosharebuybacksbycompaniesinrelationtoempoweringthem,theapplicablestatutesandthenmakesuggestionsforconductofbusinessmanagersinconsideringsharebuybackasabusinesstoolandconsiderwhetherthereisanyneedforfurtherregulatoryintervention.

THETHEORETICALCONCEPTOFSHAREBUYBACKSASACORPORATEMANAGEMENTTOOLTODELIVERMOREVALUETOSTAKEHOLDERSINTHECAPITALMARKET

Meaningofsharebuyback

Asthetermvividlyimplies,abuybackevokestheideaofacompanyusingitscashtobuyitsownshares,inotherwordsinvestinginitself.Asweshallseebelow,inNigeriathereisarestrictionplacedonpubliccompaniesbothbytheCAMAandSECRulestotheeffectthatthecompanycanonlydrawthecashneededfortherepurchasefromaspecificsource.Moreover,thebuybackscanonlybecarriedoutinacertainmannerwithinacertaintimeframeandwithinacertainproportion.

ThejustificationfortheserulesisbetterseenbyreferencetothehistoryofcompanylawandtheircodificationintheCAMA.Historically,unscrupulousmanagersandpromotersofacompanycouldcreateanartificial“bubble”orimpressionofbuoyancyofthesharesofacompanyandfueldangerousspeculativetradingofthesharesbyrepurchasingthoseshareswithloans.InordertoavoidtheprevailingincidenceoffraudcommittedontheunsuspectingmembersoftheGeneralPublicbythosewhowererunningtheaffairsofthecompany,rulesweredevelopedinthehistoryofcorporatelawpractice,andtheCAMAparticularly（Ss.158to165）placesabaroncompaniesacquiringtheirownissuedsharesortotakingadvantageofanyloanorfinancialassistancetoacquireitsownshares（Ss159and160

（1）CAMA）.Theruleisthatinordertoavoidtheincidenceoffraud,acompanycannotbuyitsownsharesorassista