FINANCES
Share buy-back schemes versus
Buy-and-sell agreements
The most common method of purchasing a shareholder’s interest in a business is in the
form of a buy- and-sell agreement which is entered into by the shareholders of a business
entity in their personal capacities. The individual shareholders insure each other’s lives,
thereby providing funding to the surviving shareholders to purchase the deceased or
disabled shareholder’s shares.
By Lucas Coetsee
Liberty Legal Specialist
S
ince the amendment to the
Companies Act, no 71 of 2008
(‘the Act’) it is now possible for a
company or a close corporation
to buy back its own shares in the form of a
share buyback scheme, governed by sec-
tion 46 of the Act. This provides sharehold-
ers with an alternative option to dispose of
their shares upon death or disability.
For that reason it is possible for a com-
pany or a CC to take out a policy on the
life of a shareholder and for the company
to utilise the proceeds for the repurchase
of such shareholder’s shares. It is how-
ever important to note that a company
which buys back its own shares cannot
hold shares in itself. Hence, when it repur-
chases or redeems its own shares it firstly
has to cancel the shares as issued and
effectively restore them to the status of
authorised unissued shares.
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SENWES SCENARIO | SPRING 2018
THE ACT CONTAINS A NUMBER OF
REQUIREMENTS TO EFFECT A SHARE
BUYBACK SCHEME:
• The scheme must be authorised by the
articles of the company and approved
by means of special resolution by the
board of the company
• The company may not buy back its
shares if there are reasonable grounds
to believe that it would not be able to
pay its debt as and when it becomes
due, or that the fair value of its liabili-
ties would exceed the fair value of its
assets. This is known as the Solvency
and Liquidity Test.
• The shares may not be acquired by the
company or CC (the entity) if it would
result in only convertible or redeemable
shares remaining as issued shares.
ESTATE DUTY IMPLICATIONS
A buy-and-sell agreement which is fund-
ed by life cover falls under the provisions
of Section 3(3)(a)(iA) of the Estate Duty
Act, and if all requirements of this section
are met the proceeds of the policy will
not be estate dutiable in the deceased’s
estate.
A requirement of Section 3(3)(a)(iA) is
that the policy h