Share buybacks
ACCA's response to the consultative document Share Buybacks issued by the UK's Department of Trade and Industry is set out below.
General
In our view, the consultative document does not make out a convincing case for why companies should be permitted to retain purchased shares as so-called treasury stock, other than to explain how the proposed reform might benefit companies in terms of cost savings. It is curious, in fact, that the document makes no reference to the ability of companies to buy and sell their own shares under ESOPs.
It will be recalled that the law currently allows companies to purchase their own shares, to reduce their share capital under s135 of the Companies Act, and to subsequently issue new shares. The various stages of these procedures incorporate safeguards to ensure that proper approval is sought and obtained and that the rights of existing shareholders are respected.
The proposed reform has the potential to weaken the power of these safeguards.
In fact the document acknowledges that the reform would offer quoted companies the opportunity to create a false market or to manipulate the price of their shares. This, as we see it, remains a very serious argument against any change towards a more liberal regime, at least as far as quoted companies are concerned.
For this reason, it is essential that any reform on the lines proposed is accompanied by measures to restrict the scope for abuse. It should certainly be provided that the conditions to be fulfilled by a company when re-selling treasury shares should be comparable to those imposed on a company intending to issue new shares. There should, accordingly, be shareholder authorisation and respect of pre-emption rights.
Voting and dividend rights of treasury shares must be suspended until the shares are re-sold, and, in the case of quoted companies, issues at sensitive times, such as before announcements and during take-overs, must be prohibited.
Accounting treatment
Para 5.19 of the document implies that treasury shares should be treated as assets in the company's balance sheet and that gains or losses must be dealt with by the company through the profit and loss account in the same way as when it sells any other asset.
We do not agree with this accounting approach. In fact, article 22(1)(b) of the Second Directive does not require own shares to be held in the balance sheet as assets. In our view, the cost of purchase should be shown as a deduction within shareholders' funds, and not on the asset side of the balance sheet. In addition, the gain or loss on shares re-sold ought to be treated as a transaction with owners, and not as part of the results of the year of disposal. Accounting practice in the US, where re-sale of treasury stock has long been permitted in certain states, follows this line. The International Accounting Standards Committee also proposes this treatment in its recently issued draft interpretation D16.
ACCA's responses to the individual questions posed in Annex A of the document are set out below:
Share Buybacks: Responses to specific questions posed in Annex A
Q1 We have reservations in principle about allowing the re-sale of purchased shares. At the very least, there should put in place substantial safeguards to prevent the possibility of abuse.
Q2 If the law is amended to allow re-sale of treasury shares, then this change should apply to private and public companies alike.
Q3 Yes to both questions.
Q4 All treasury shareholdings should have to be disclosed, even those falling under the 3% threshold discussed in the document.
Q5 Yes.
Q6 Pre-emption rights should be respected on the re-sale of treasury shares. There should be a distinction drawn between those treasury shares sold at a discount and those sold on the open market.
Q7 Yes to all three questions.
Q8 Companies should be required to announce in advance their intention to re-sell treasury shares. Retrospective reporting in the annual report would not be sufficient.
Q9 Yes.
Q10 Yes.
Q11 No.