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ASIC’s position on off-market share buy-backs incorporating fully franked dividends

ASIC has rejected the view that off-market share buy-backs, where part of the price is treated as a franked dividend, were a breach of the Corporations Act. In ASIC’s view, no part of the amount paid by a company to buy-back a share is a dividend for Corporations Act purposes, even though it might be taxed as a dividend. the fact that part of the buy-back price is attributable to: • retained earnings; • deemed to be a dividend for tax purposes; or • franked under the dividend imputation system, does not make it a dividend for company law purposes. ASIC also believes that the provision in the Act that says each share in a class has the same dividend rights does not apply to a payment made to buy back a share. A dividend, for the purpose of that provision, is a distribution of profits as a reward to shareholders as the ongoing equity owners. In a buy-back, on the other hand, participating shareholders agree to give up ownership in return for a lump sum payment. The timing, composition and calculation of that payment is not made from rights in the constitution, but from the buy-back agreement made with the company. The fact that some or all of the funds used might otherwise have been available for paying dividends does not make the payment a dividend. The dividend and buy-back regimes operate quite separately. There has been a clear and public enunciation of the negative implications of off-market buy-backs for ‘retail’ shareholders. An off-market buy-back at below prevailing market prices is unattractive to a ‘retail’ shareholder on a normal tax rate. This means they generally do not participate, but see lower tax-paying shareholders receiving very large distributions of franking credits, as well as a capital loss against which other capital gains can be offset. This is regarded by opponents of such buy-backs as inequitable and discriminatory, particularly when there are other ways that excess share capital can be returned. On the other hand, the company can benefit from off-market buy-backs because the greater the tax advantage to certain shareholders, the more likely it is that the company can buy back shares at below prevailing market prices. This is not achievable in an on-market buy-back. Also, it must be assumed that the success of recent off-market buy-backs means that many shareholders are not opposed to them. The question of whether an off-market share buy-back is appropriate for a company is a matter for directors. ASIC would consider intervening in cases where it believed directors were in breach of their duties (eg. by having regard to the interests of low-tax paying shareholders) or, for example, where the information given to shareholders about the buy-back was misleading or otherwise defective. ASIC would also consider intervention if it found the view that a buy-back were conducted for an improper purpose.

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