Share Buyback

A share buyback, also called a share repurchase, is a transaction in which a company buys its own shares from existing shareholders. The shares bought are either cancelled or held by the company as treasury shares, and in both cases they no longer count towards earnings or dividends. Companies use buybacks to return surplus cash, to adjust the balance between debt and equity, and to offset the new shares created by employee share schemes.

Alongside the dividend, the buyback is one of the two main forms of shareholder distribution. The difference is that a dividend pays every holder in proportion, while a buyback pays only those who choose to sell; the remaining holders end up owning a larger share of the company.

Companies repurchase shares in several ways:

• Open-market purchases. The company instructs a broker to buy shares on the exchange over weeks or months, within limits on price and daily volume. This is the most common method and leaves the company free to slow or stop.
• Tender offer. The company invites all shareholders to sell a stated number of shares at a fixed price, usually above the market price, within a set period. Handling of such offers is covered under tender offer processing.
• Dutch auction. In a Dutch auction tender, holders state the price within a range at which they would sell, and the company buys at the lowest price that fills its target.
• Accelerated repurchase. An investment bank borrows shares and delivers them to the company at once, then buys shares in the market over time to return to the lenders.
• Targeted purchases. The company buys from a particular holder by private agreement, or makes an odd-lot offer to holders of very small positions.

A buyback reduces cash and shareholders' equity by the amount spent. Because profit is then divided among fewer shares, earnings per share rise even if total profit is unchanged, and return on equity usually increases because equity is smaller.

As an example, a company with profit of 100 million and 50 million shares earns 2.00 per share. If it buys back 5 million shares, the same profit spread over 45 million shares gives about 2.22 per share, an increase of roughly 11 per cent with no change in the underlying business. The value created for continuing shareholders depends on the price paid: buying shares for less than they are worth benefits those who stay, while overpaying transfers value to those who sell.

Because a buyback returns capital that would otherwise protect creditors, company law controls it. In the United Kingdom and most European countries, shareholders must authorise repurchases at a shareholder meeting, usually up to a percentage of the issued shares and for a limited period, and the purchase must generally be funded from distributable profits. A buyback that goes beyond this is treated as a capital reduction. In the United States, the board normally authorises a programme under state law without a shareholder vote.

Securities law deals with the risk that a company's dealing in its own shares distorts the market. A company trading while holding undisclosed price-sensitive information risks insider trading liability, and heavy buying could amount to market manipulation. In the United States, SEC Rule 10b-18 provides a safe harbour for repurchases that respect conditions on the manner, timing, price and volume of purchases. In the European Union, the Market Abuse Regulation gives a comparable exemption for buyback programmes that meet its conditions and disclose trades promptly. Listed companies must announce programmes and report purchases.

Tax is a common reason for preferring buybacks to dividends. In many systems a shareholder who sells into a buyback is taxed on a capital gain, often at a lower rate than dividend income and only on the profit element, and holders who do not sell pay nothing. Since 2023 the United States has imposed an excise tax of one per cent on the net value of shares repurchased by listed companies.

Open-market purchases settle like any other trade, and investors do not need to act. A tender offer is a voluntary corporate action: custodians notify holders, collect instructions before the deadline and, if the offer is oversubscribed, apply the scaling-back announced by the company. Repurchased shares are either cancelled, reducing issued share capital, or recorded as treasury stock and deducted from equity. The movement is shown in the statement of changes in equity.

Critics argue that buybacks can be used to flatter per-share measures on which executive pay depends, that companies tend to buy most when prices are high and stop when they are low, and that cash is diverted from investment and wages. Borrowing to fund repurchases increases financial risk. Supporters reply that returning cash a company cannot use well allows investors to redeploy it, and that buybacks are more flexible than dividends, which markets expect to be maintained. A one-off alternative for returning a large sum is a special dividend.

• U.S. Securities and Exchange Commission
• European Securities and Markets Authority