Balancing conflicting interests : a comparative view on share repurchases

Abstract

This thesis analyses the regulation of share repurchases in public limited companies in New Zealand, Germany and the United States. An examination is made of the core features of share repurchases, the purposes for which they may be created, and the risks involved in allowing own- share repurchases. However, the regimes regulating share repurchases do not adequately balance the interests of the parties concerned, these are the shareholders, creditors, directors and the company itself. The law makers provides for procedures, disclosure duties and director obligations and the courts fill in gaps by requiring directors to comply with fiduciary duties, and these protect shareholders' interests and prevent directors furthering their own interests to the detriment of the company and its shareholders. However, the creditors' concern that a company maintains its capital is somewhat neglected and creditors need to protect themselves with contractual covenants. There are various reasons for a corporation to conduct a repurchase and different repurchase methods can be used by companies. When directors decide to repurchase and to use a certain method, they have to have regard to the interests of concerned parties. If those interests are disregarded, damage can result to those parties. Therefore, risks of repurchases for concerned parties exist. The statutory and historical background shows by comparison that, although today in all jurisdictions company and securities law regulate buybacks, the history of repurchases regulation varies widely. These variations led to the current legislative regimes that are markedly different. Regimes have been implemented by statute. In comparison, it can be seen that these regimes allow for adequate protection of shareholders' interests. Another matter that can affect shareholders' interests is the danger of insider trading. The company is the ultimate insider. To prevent the company from taking advantage of insider knowledge, disclosure requirements are imposed that in various ways protect shareholders' interests. A core issue of this thesis is the discussion of directors' duties in respect of own share repurchases. When directors repurchase a company's own shares, their interests can conflict with the interests of the company and its shareholders. In a comparison, it can be seen that jurisdictions allow for more or less flexibility in conducting repurchases which does not always prevent the use of repurchases by directors for their own benefit. All these features, however, are of little concern to creditors. Their interest is that the company can pay their claims as they become due and that it maintains its capital for that purpose. Repurchases pose a risk to creditors as they involve a distribution of the corporation's assets without receipt of a quid pro quo. The comparison of capital maintenance regimes and accounting for repurchases as well as the treatment of possible avoidance transactions show that the legislature does not provide complete protection for creditors. Creditors, therefore, aim to protect themselves through contractual covenants are briefly considered. Even though capital maintenance rules are enacted, unlawful repurchases do happen. They result in a personal liability of directors and selling shareholders. In view of the financial impact of repurchases, a comparison of repurchases with other distributions like dividends shows that other distributions could be an alternative means to fulfil the same purpose as repurchase. However, it becomes clear that share repurchases are the most flexible instrument to return surplus wealth to shareholders. This thesis comprises of approximately 52380 words. The reference to German statutes, cases and journal articles follows German citation rules in accordance with the Bluebook. The annex includes a short explanation.