Share buy-backs – form over substance?

Key Points
  • In effecting a selective buy-back of shares a company cannot dispense with the need to hold a general meeting simply because it is inconvenient to do so. This will be the case even if the buy-back is pre-approved by the required majority of members.
  • Section 259A(c) of the Corporations Act 2001 (Cth) (Corporations Act) cannot be used to mount a freestanding application for an order under that section.
  • The courts will not approve a share buy-back that contravenes the provisions of the Corporations Act unless the contravention is purely procedural, the person concerned acted honestly and/or the circumstances are such that it is just and equitable to approve the transaction.


In the matter of Wollongong Coal Ltd [2017] NSWSC 201, the Supreme Court of New South Wales was asked to consider whether a selective buy-back of shares needed to be approved at a general meeting of members of Wollongong Coal Limited (WCL) in circumstances where the required majority of shareholders pre-approved the transaction.

Part 2J.1 of the Corporations Act sets out the procedure that must be followed when implementing a selective buy-back.  It requires, amongst other things, that the buy-back must be approved by shareholders in the manner set out in section 257D.

The proposed buy back was part of a settlement that WCL had reached with the shareholder whose shares were to be bought back and was presented as a good outcome for WCL and its shareholders.  In an attempt to dispense with the need to hold a general meeting of members, WCL sought to rely on:

  • section 259A(c) which allows the Court to approve a selective buy-back of shares under court order; and
  • section 1322(4) which permits the Court to approve a transaction that contravenes the provisions of the Corporations Act in circumstances where the contravention is procedural, the person concerned acted honestly and/or in circumstances where it is just and equitable to do so.

WCL advanced several reasons as to why it was appropriate and beneficial to dispense with the need to hold a general meeting of members including the fact that:

  • no shareholder or creditor had opposed the application
  • the application had the support of the requisite majority of shareholders
  • it would avoid the company incurring further costs
  • it would restore the shareholders to their positions before the shares were issued
  • it would save the company from having to extend time, effort and money in holding a general meeting in circumstances where the buy-back was pre-approved and thereby inevitable.

The Court rejected the submissions and held that a meeting of members is an important forum for a company as it enables members to meet with those entrusted with the company’s management and be provided with an opportunity to raise any questions or concerns, regardless of the outcome of the meeting. The mere fact that a company considers that it is inconvenient to call a general meeting is not of itself sufficient to enable the company to dispense with the need to do so or to deny shareholders the right to be present, heard and have their votes counted.

As to the applicability of section 259A(c), the Court held that the section does not confer a freestanding discretionary jurisdiction on the Court to make orders exempting a company from the prohibition on its acquisition of an interest in its own shares or from compliance with the statutory buy-back regime.  Even if it did, the Court indicated that it would not exercise the discretion to make such an order.

Turning to section 1322(4), the Court held that WCL’s preference not to call a general meeting to approve the buy-back was not sufficient to warrant the relief sought.

While the argument that WCL knew it had sufficient votes to approve a selective buy-back if it were taken to a meeting of members may be superficially attractive, it is difficult to understand why obtaining a court order in those circumstances was the preferred option.  It can hardly have been cheaper and is unlikely to have been quicker than holding the meeting in the first place.

Post by Vanja Simic and John Kell 

Most Popular Articles

Blog

When can the unqualified be qualified? Non-lawyers engaging in legal practice - when is it OK and when is the law broken

Only lawyers can provide legal advice, but anyone can provide legal information. When thinking of the difference, you might ask your friend or colleague to provide information about a serious illness; however you would seek out a qualified medical professional in relation to its treatment.
Blog

Service of Notices by Registered Post

Where service of a notice is authorised or required by post, unless the contrary intention appears, service will be deemed to be effected at the time when the notice would be delivered in the ordinary course of post: see the various Acts Interpretation acts of the States and Commonwealth.
Blog

Thanks, but no thanks – I don’t want to inherit

It seems odd that anybody would reject an inheritance, but for some beneficiaries, there are valid reasons they do not wish to receive their inheritance.

Subscribe to Our Blog

Keeping you connected, Hicksons regularly publishes articles to keep you up to date on the latest developments. To receive these updates via email, please subscribe below and indicate which areas of law you would like to receive information on.

Top