LEGALIMPLICATIONSOFSHAREBUYBACKFinal.docx

1、LEGALIMPLICATIONSOFSHAREBUYBACKFinalLEGAL IMPLICATIONS OF SHARE BUYBACKSBy Chief Anthony I. Idigbe SAN* “When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the market place, no alternative action can benefit sharehold

2、ers as surely as repurchases ”Warren BuffettGentlemen of the Fourth Estate, I must straightway confess my delight and honour to be in your midst today to discuss the topic I have been asked to handle.This is because when I received the invitation letter from the organizers of this programme, I was s

3、urprised to see that it was issued by members of the print and electronic media reporting in the area of capital market who had come together with a goal of discharging their duties in a most responsible manner in terms of financial journalism. It is most heartwarming to see such focused intent to e

4、nhanced professionalism based on a proper understanding of the arduous technical financial/legal information that they report on. Your work is ultimately consumed by members of the general public and in particular stakeholders in the Nigerian Capital Market and forms the cheapest and broadest way of

5、 informing their investment decisions. It is to the credit of your organization, that you strive to train your members to stay abreast of the latest developments in the Nigerian Capital market and even outside the shores of Nigeria. The new more detailed SEC rules regulating share buybacks is an int

6、eresting development for the Nigerian Company law and practice as well as a welcome development aimed at curbing sharp practices of directors and controlling shareholders using companys resources to entrench their control over the company. The traditional conception under Nigerian Company Law is tha

7、t companies should not be seen to buy their own shares. It was felt that there was an inherent conflict in such a transaction. However, best practices have been changing worldwide in relation to the concept of share buy back. The question would now seem to be to what extent is it desirable to have g

8、overnment intervention by way of regulation rather than absolute prohibition.The relevant rule for our review here is rule 109B formerly described as relating to “acquisition of own shares by companies” and now meant to read “rules relating to share buy-back”. Obviously here, the modification of the

9、 title of this particular Rule has no other role than to align same to the specific technical term/jargon used in international best practice of financial and capital market circles. Hence, the terms “buybacks”, “stock buybacks”, “share repurchase” are clearly and interchangeably used depending on t

10、he jurisdictionsBefore we proceed to analyze the rules laid out by the Nigerian SEC, it is pertinent to have a full grasp of the concept of share buyback by defining the meaning and scope thereof, its role in terms of capital allocation, motivation for use of share buybacks by companies and imperati

11、ve for regulation of share buybacks.We shall thereafter examine the regulatory framework created by SEC with respect to share buybacks by companies in relation to empowering them, the applicable statutes and then make suggestions for conduct of business managers in considering share buy back as a bu

12、siness tool and consider whether there is any need for further regulatory intervention.THE THEORETICAL CONCEPT OF SHARE BUYBACKS AS A CORPORATE MANAGEMENT TOOL TO DELIVER MORE VALUE TO STAKEHOLDERS IN THE CAPITAL MARKETMeaning of share buybackAs the term vividly implies, a buyback evokes the idea of

13、 a company using its cash to buy its own shares, in other words investing in itself. As we shall see below, in Nigeria there is a restriction placed on public companies both by the CAMA and SEC Rules to the effect that the company can only draw the cash needed for the repurchase from a specific sour

14、ce. Moreover, the buybacks can only be carried out in a certain manner within a certain time frame and within a certain proportion. The justification for these rules is better seen by reference to the history of company law and their codification in the CAMA. Historically, unscrupulous managers and

15、promoters of a company could create an artificial “bubble” or impression of buoyancy of the shares of a company and fuel dangerous speculative trading of the shares by repurchasing those shares with loans. In order to avoid the prevailing incidence of fraud committed on the unsuspecting members of t

16、he General Public by those who were running the affairs of the company, rules were developed in the history of corporate law practice, and the CAMA particularly (Ss. 158 to 165) places a bar on companies acquiring their own issued shares or to taking advantage of any loan or financial assistance to acquire its own shares (Ss 159 and 160 (1) CAMA). The rule is that in order to avoid the incidence of fraud, a company cannot buy its own shares or assist a