| Tom Bloomfield and Nicola Betteridge
In this update we look at Share Buy-backs in the Listed Investment Company (LIC) sector as a capital management initiative. We examine the general rules that apply, the types of buy-backs that should be considered and the disclosure considerations for LICs. This update does not intend to consider when a share buy-back should be considered. It aims only to provide an overview of the governance aspects for LICs to consider.
In the three years to 31 January 2017, the LIC sector in Australia has grown to a market capitalisation of $31.4 billion.1 The growth last year was over $3 billion.2 LICs remain a popular investment choice for investors looking for a consistent dividend return.
Factors causing LICs to trade at a substantial discount to their NTA have caused boards to consider capital management initiatives. One of the main initiatives considered by LICs is a Share Buy-back.
Recent examples indicate a buy-back may have assisted in narrowing the discount. Ellerston Asian Investments Limited (ASX:EAI) announced a share buy-back on 13 September 2016. The buy-back commenced on 27 September 2016 and the company reported that the discount to NTA narrowing from approximately 19% to approximately 10% as at 31 September 2016.
A company may only buy-back its shares if the buy-back would not materially prejudice its ability to pay its creditors. A director of a company is not relieved of the usual directors’ duties under the Corporations Act 2001 (Cth) (the Act) or a director’s fiduciary duties due to the corporate actions approval by shareholders.
For example, the duty to prevent insolvent trading is a duty imposed on directors regardless of any direction from shareholders including at a general meeting. Section 588G(1A) addresses this issues in relation to buy-backs as it deems a company to have incurred a debt for the purposes of the insolvent trading provisions in the Act when the relevant buy-back agreement is entered into. Directors are obligated to ensure that any buy-back does not prejudice creditors and that the LIC can continue to pay its debts as and when they fall due and payable.
The LIC should also consider its own constitution to ensure there are no restrictions on a buy-back or additional/ specific approvals that may be required. In most cases it will be sufficient to rely on the Listing Rules and the Act.
The most common type of Buy-Back in the LIC sector is an on-market buy-back and equal access scheme buy-back.
Each type of buy-back requires a different procedure to be followed. The characteristics of buy-back most relevant to LICs are briefly summarised below:
For listed companies, the procedures set out in the Listing Rules must be observed in addition to the Corporations Act, including:
This update is prepared by the Company Secretarial Team at Boardroom Pty Limited. The update is designed to provide general information and is not designed to replace legal or tax advice or a detailed review of the subject matter nor is it intended to cover all circumstances.
1 Monthly Reports, ASX Listed Companies (LICs) (31 January 2017) MorningStar https://www.morningstar.com.au/LICs/MonthlyReports
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