“I’m a shareholder in a private company and wish to get rid of my shares to free up some cashflow. That said, I don’t want to sell to a stranger and my other shareholders don’t want to buy my shares either. One of them suggested that the company buy back my shares. Is this allowed?”

What you are referring to is a share buyback, and such are an accepted method of disposing of your shares in a company as an alternative to selling to a third party. That said, share buybacks are strictly governed by the Companies Act 71 of 2008 and in particular section 48 thereof, with non-compliance potentially resulting in the transaction being voidable as well as potential personal liability on the part of directors that voted in favour of the transaction. This means, that although share buybacks are possible, care should be taken to comply with the related provisions of the Companies Act. 

Share buybacks are common transactions used to dispose of shares in a company and is an alternative to selling the shares to third parties. While the use of share buybacks may seem appealing, the arrangement is strictly governed by the Companies Act 71 of 2008 (the “Companies Act”). Failure to comply with the provisions of section 48 of the Companies Act may result in the transaction being voidable. It may also lead to personal liability on the part of the directors who voted in favour of the transaction.

From a tax perspective it may also be noted that a share buyback is not considered as a disposal in the strictest sense of the word, and would therefore not be subject to capital gains tax, but would the purchase price generally (subject to exceptions as there always are when it comes to taxation) be deemed a dividend for income tax purposes. This should also be kept in mind when considering a buyback.

Section 48 of the Companies Act regulates when a company may acquire its own shares, including restrictions on subsidiaries etc. In general, however, section 48 requires that the following conditions be met, prior to implementing any share buyback: 

1. The company must reasonably satisfy the solvency and liquidity test after the transaction is finalised.
2. The share buyback transaction should be approved by a special resolution of the shareholders if the shares are to be acquired from a director of the company or a related person.
3. The company must comply with sections 114 (independent expert reports) and 115 (required approvals) of the Companies Act (to the extent applicable) where the transaction involves the buyback of more than 5% of the issued shares in the company.

To conclude, a share buyback is possible, but should be correctly dealt with in accordance with the requirements of the Companies Act. It would therefore be advisable to consult your attorney or corporate specialist for assistance to structure the share buyback correctly, should this be your chosen route of disposing of your shares.