Series 1: Article 6
JSE Aiming at Cutting the Red Tape
Intragroup Repurchases of Securities
In our sixth and penultimate article entitled “Intragroup Repurchases of Securities”, the Merchantec Capital Sponsor Team is nearing the end of its Series “JSE Aiming at Cutting Red Tape”.
With the key focus of the JSE’s March 2021 Consultation Paper being “effective and appropriate level of regulation”, and as it seeks to do away with unnecessary “red tape”, the JSE is proposing amendments around, inter alia, “Intragroup Repurchases of Securities”.
Before we consider the proposed amendments, let’s look at the Current Listings Requirements’ provisions
An acquisition by an Issuer of its own securities or a purchase by a Subsidiary of securities in the holding company (in accordance with section 48 of the South African Companies Act of (“Companies Act”)) is regarded as a repurchase of securities in terms of the Listings Requirements. Such repurchases require the approval – either under a general authority or a specific authority to repurchase securities – of at least 75% of all shareholders, excluding participants and associates, as the case may be.
A pro rata repurchase by an Issuer of its securities from all shareholders does not require shareholder approval, save to the extent required in terms of the Companies Act.
Background to the proposed change
It is not uncommon that Issuers acquire treasury shares, held by a Subsidiary or share incentive scheme (end of life), for share consolidation purposes. These shares are then either cancelled or held for future use for other share incentive schemes. In these circumstances:
- the Issuer effectively controls both ends of the corporate action, and are regarded as intragroup transactions on the basis that there is no money leakage from the group;
- there is no impact on earnings per share, headline earnings per share and net asset value per share as the shares are treated as treasury shares, and will continue to be treated as such if not cancelled; and
- the repurchased shares do not create a benefit for any one shareholder as the shares are merely cancelled or remain consolidated in the Issuer’s group as treasury shares.
What has been proposed?
As the current Listings Requirements do not make a distinction in respect of intragroup share repurchases, the JSE is proposing to remove the application of the Listings Requirements and shareholder approval requirements pertaining to intragroup share repurchases, provided the share repurchases transpire between:
- the Issuer and its wholly-owned Subsidiaries; or
- the Issuer and Schedule 14 share incentive schemes (ie. share schemes approved by the JSE in terms of Schedule 14 of the Listings Requirements and controlled by the Issuer to incentivise employees).
What remains unchanged?
All repurchase of securities must comply with sections 46 and 48 of the Companies Act (including the passing of the solvency & liquidity test by the Issuer’s Board).
Issuers will be required to continue to disclose in its Annual Report, details in respect of:
- the repurchase by an Issuer of its own equity securities; or
- a purchase by a Subsidiary of equity securities in its holding company (in accordance with section 48 of the Act) during the period under review.
What is the JSE’s rationale for the proposed amendment?
The repurchase of securities is primarily regulated by the Companies Act. Furthermore, with regards to intragroup repurchases of shares there is:
- no money leakage from the Issuer’s group;
- no impact on earnings per share, headline earnings per share and net asset value per share;
- no creation of a benefit for one shareholder over another.
Would the proposal be beneficial to your company?
The Merchantec Capital Sponsor Team will soon complete this Series in which we’ve been unpacking the proposals contained in the Consultation Paper.
We hope that you are enjoying this series, and look forward to receiving your feedback.