Share buyback schemes aid to company solvency

What better way to show that you believe the strength of your own advice than by investing in your company?
By : Lejb Fogelman

   The Commercial Companies Code (CCC) upholds the long-standing doctrine of Polish law that a joint stock company cannot acquire or take a pledge on its own shares. It seems logical, you may be thinking, why would a company ever want to own its own shares anyway? Actually, a company can use a buyback of its own shares to solve any number of problems from shoring up soft share prices or increasing dividends to staving off hostile takeovers or establishing employee incentive programs.

   Every good rule has its exception, and the CCC sets forth a number of them when it comes to the no-holding-your-own-shares rule. Some of the more interesting exceptions allow a company to hold shares temporarily under extraordinary circumstances. Some of these are tried and true carryovers from earlier law, including the right to acquire shares to satisfy claims against a shareholder that are not otherwise recoverable from the shareholder’s other assets and the right to redeem shares.

   CCC adds to this list a key exception for crisis management by permitting the acquisition of shares to prevent a “major harm with which the company is directly threatened.” One of the more commonly cited “major harms” is the consequences of a hostile acquisition. A company’s acquisition of its own shares can be a tool used in its defense.

   While the management board has the flexibility to acquire the company’s shares to ward off unwanted invaders, it needs to notify the shareholders of the situation. At the next general shareholders meeting, the management board must inform the shareholders about the share buyback, stating its purpose, the number and nominal value of shares purchased, their percentage in relation to the total share capital and the financial terms of the purchase.

   Another exception added by the CCC allows the acquisition of shares in order to offer them to employees or to persons who were employed in the company or an affiliate for more than three years. Because employee incentive plans usually do not involve crisis situations, the management board needs to obtain the consent of the general shareholders meeting prior to acquiring the shares. An additional limitation is that shares acquired by the company for that purpose must be offered to eligible persons not later than one year after acquisition.

   Yet even greater restrictions limit these two exceptions. The amount of its own shares that a company is allowed to hold cannot exceed 10% of its share capital, as measured by the nominal value of the shares. Further, these shares must be fully paid. As the minimum share capital of a joint stock company is quite high, Polish law permits partial payment for shares upon incorporation. Finally, a company that buys back its own shares must create a reserve amounting to, at least, the purchase price for the shares.

   Apart from these temporary and exceptional reasons, a company may also acquire its own shares in a few other ways. A company can receive its own shares as a gift or inheritance. Financial institutions may acquire their own shares on their own or another’s behalf as an investment for subsequent resale. After all, what better way to show that you believe the strength of your own advice than by investing in your company? Finally, the CCC includes a general catch-all permitting a company to acquire its own shares in other circumstances anticipated by law, such as the acquisition of shares by the surviving company to a merger.

   The CCC cuts a little slack for companies that were over eager when it came to buying back shares. If a company buys back its own shares in compliance with one of the specific exceptions but buys too many shares, it must dispose of that portion of the shares in excess of 10% of the company’s share capital within two years of acquisition. However, if the company acquires shares other than as permitted, it must transfer them within one year.

   If the company fails to dispose of the shares within a specified period, the management board of the company must redeem the shares without convening a general shareholders meeting. This even applies to the period for disbursing shares to employees under an incentive program.

   Although violating the buyback rules does not invalidate a transaction, the company cannot exercise certain shareholder rights, such as rights to vote and receive dividends on those shares that it holds in violation of the rules. In fact, the only shareholder right that it maintains is the power to transfer the shares or to perform acts conducive to preserving this right.

   Although this article has focused on buying back shares, it is worth noting that a company cannot acquire its own newly-issued shares and no general exceptions exist to this rule.

   Finally, in recognition of the increasingly complex structure of corporate holdings, the CCC extended the no-holding-your-own-shares rule to subsidiaries and intermediaries acting on behalf of the company.

   In summary, joint stock companies can find some comfort in the CCC when faced with a dilemma that requires them to hold their own shares.

   This article was prepared by Lejb Fogelman, the managing lawyer of Hunton & Williams Poland, with the assistance of Beata Kostro, an associate attorney.