The Companies Act No. 71 of 2008, as amended (“the Act”), provides that a company may acquire its own shares to the extent that it is solvent and liquid, as more fully described in Section 4 of the Act.
In essence, a share buy-back is a transaction where a company buys a portion of its shares and then cancels the shares, to leave the remaining shareholders with larger stakes in the company. This transaction has gained a lot of popularity over the years, especially for taxpaying individuals who intend to dispose of its shareholding. With a buy-back, the number of shares that have to be serviced by the company, is reduced permanently and, from then on, distributions are made between fewer shareholders.
The reason for the popularity of share buy-backs is evident when consideration is given to the definition of a dividend in Section 1 of the Income Tax Act No. 58 of 1962 (“ITA”). This definition provides that the proceeds from a share buy-back will be deemed to be a dividend to the extent that it is not funded out of so-called share capital or contributed tax capital (“CTC”). To the extent that the selling shareholder is a company, as opposed to an individual, such dividend would also not be subject to dividends tax at a rate of 20% due to the fact that a dividend paid to a resident company is exempt from dividends tax and instead capital gains tax (“CGT”) at the normal company rate of 22.4% is paid.