Repurchasing, or “buying back” shares from a shareholder involves a series of documents, confirmations, and notices, before the corporation can finally acquire and cancel the shares. The article below sets out the major considerations and how to complete a share repurchase using Ownr.
Restrictions on Share Repurchases
Before you repurchase shares, be sure to review your corporation's Articles of Incorporation, corporate By-laws and Shareholder Agreement (if any) to ensure that the proposed share repurchase is permitted.
Also make sure that the corporation complies with the applicable requirements in terms of solvency and sufficient net worth prior to authorizing or completing a share repurchase. Those requirements might vary slightly depending on the jurisdiction of incorporation of your corporation.
The directors who approve a share repurchase, as well as the shareholder whose shares are being repurchased, might incur liability if a share repurchase is authorized or completed in contravention of the solvency or net worth requirements.
Restrictions on Redeemable Shares
Shares that are subject to a right of redemption, which allow the corporation to repurchase the share at any time, or a right of retraction, which allows the shareholder to require the corporation to repurchase the share at any time, are considered to be “redeemable” and might be subject to special restrictions.
Those restrictions, in applicable jurisdictions, generally prevent a corporation from repurchasing redeemable shares at a price higher than the redemption and/or retraction price. They also require the corporation to meet special solvency and net worth requirements to repurchase shares.
There can be complicated tax implications on a shareholder resulting from the repurchase and cancellation of shares.
Tax implications can include capital gains if a shareholder sells their shares for more than the original purchase price or, conversely, capital losses if a shareholder sells their shares for less than the original purchase price.
Tax implications can also include deemed dividends if a shareholder sells their shares for more than the paid-up capital of those shares.
It is highly recommended that you speak with an accountant or a tax lawyer prior to repurchasing shares, so the shareholder can determine the most tax efficient way to have their shares repurchased.
How to Repurchase Shares on Ownr
Login to your Ownr account and click 'SHARES' -> 'Repurchases'. From this screen, you'll be able to initiate the process of repurchasing and cancelling shares.
After clicking 'Repurchase Shares', the following panel will appear:
Here you will identify the number and class of shares to be repurchased. The corporation can repurchase and cancel all or a portion of the shares of a shareholder. Where a repurchase would result in the corporation no longer having any voting shareholders, it is mandatory to leave the shareholder at least one voting share.
Price per Share and Total Amount Paid
Once the number and class of shares are identified, a price per share needs to be set for the repurchase of shares. Keep in mind the total amount paid is different from the price per share. The total amount is the gross aggregate payment for all shares that are being transferred.
The Closing Date of the share repurchase is the date the share repurchase transaction will be completed and the shares cancelled.
Before repurchasing shares, make sure that it does not contravene to any shareholder agreements, and if it does, make sure to obtain the necessary consents and waivers from the relevant shareholders prior to closing the repurchase transaction. Even when it is not necessary, it is good practice to obtain the other shareholders’ consent prior to a share repurchase.
Notices to Shareholders
In certain jurisdictions, such as Alberta and Quebec, the law requires that all shareholders be notified of a share repurchase within a certain period of time (30 days) after the closing of the transaction.
In addition to this notification requirement, the law in those jurisdictions also grants shareholders the right to obtain a copy of the repurchase agreement from the corporation free of charge.
When repurchasing shares on Ownr, there are four documents that are automatically created:
Share Repurchase Agreement
Resolution Repurchasing Shares
Notice of Share Repurchase
Shareholder Consent to Repurchase
Also, the share register for your corporation will be updated once all the documents have been signed.