Knowledge

Guernsey law permits a Guernsey company to acquire its own shares either "off market" by way of a direct written agreement between the company and one or more of its shareholders, usually called a share buy-back, or, if it is listed on a stock exchange, "on market" using the mechanism of the relevant market and subject to a marketing arrangement, often by way of a tender offer. In addition, if issued on terms that they be redeemable, shares may be redeemed by the company. Once acquired, the shares will be cancelled unless, if permitted by the company's constitution, the directors resolve to retain them as treasury shares.

Such an acquisition may be attractive to boards and shareholders alike for a number of reasons, for example:

-     to return capital to shareholders;

-     to consolidate share ownership;

-     to make adjustments to the financial statements; or

-     in the case of a listed investment company, to reduce any discount in its share price to its underlying net asset value.

In any case, there are a number of requirements under the Companies (Guernsey) Law, 2008 (as amended) (the "Law") that the company will need to comply with in making the acquisition. Most notably, the directors must resolve and certify that the company will be able to satisfy the statutory solvency test, on a cashflow and net asset basis, immediately after the acquisition.

Fundamental requirements and restrictions

In order for a Guernsey company to acquire its own shares, the company must be authorised to do so by its memorandum and articles of incorporation. The acquisition by the company of its own shares must be effected on such terms and in such manner as may be provided for by that company's memorandum or articles, or the terms of the issue of those shares.

A company may not acquire its own shares if, as a result of the acquisition or redemption, the company would have no members.

Guernsey companies are free to return capital and earnings to shareholders without recourse to the courts and without creditor approval.

Types of acquisitions

First, a company may acquire its own shares pursuant to a written contract with one or more shareholders in an "off market" acquisition. Such a contract must be authorised by the shareholders by an ordinary resolution before it is entered into.

Second, if the company is listed on a stock exchange, a company may acquire its own shares by means of a "market acquisition", otherwise known as an "on market acquisition", which is defined by the Law as "an acquisition of shares made on a recognised investment exchange, provided that the acquisition is subject to a marketing arrangement". Market acquisitions must be authorised by means of an ordinary resolution of the shareholders of the company, as well as be authorised by the memorandum and articles of the company. Where a market acquisition is authorised, such authorisation may be general or limited to the acquisition of shares of any particular class or description and may be either conditional or unconditional. The authorisation must, however, specify the maximum number of shares authorised to be acquired, determine both the maximum and minimum prices which may be paid for the shares and specify a date on which it is to expire.

It is worth noting that the rights of a company in either case are not assignable. However, a company may release its rights in an off market acquisition if the terms of the release agreement are approved by ordinary resolution in advance.

Finally, if the company has issued redeemable shares, those shares may be redeemed by the company in accordance with the terms of issue.

Acquisitions treated as distributions

Payments made by the company in connection with the acquisition by a company of its own shares are treated as distributions. Where a company makes a payment in consideration of:

-     acquiring any right in respect of an off market acquisition;

-     the variation of a contract in an off market acquisition; or

-     the release of any of the company's obligations under a contract for an off market acquisition or under a contract for an on market acquisition,

such payment will also be treated as a distribution. The Law similarly confirms that the redemption of shares by a company and the acquisition of shares by a company are distributions subject to the Law.

Solvency test

In light of the treatment of all types of such acquisitions as distributions, the company will be required to satisfy the solvency test under the Law. To do so, the directors of the company must be satisfied on reasonable grounds that the company will, immediately after the payment, satisfy the statutory solvency test as well as any other requirement in its memorandum and articles. As part of the authorisation required by the directors, they must approve a certificate stating that, in their reasonable opinion, the company will, immediately after the distribution, satisfy the solvency test and provide the grounds for that opinion. The certificate must be signed on the company's behalf by at least one director.

A company satisfies the solvency test if it is able to pay its debts as they become due and the value of its assets is greater than the value of its liabilities. In the case of a company supervised by the Guernsey Financial Services Commission, the company must also satisfy any other requirements as to solvency imposed on it by applicable regulation. Additionally, the test is cumulative, meaning that a company is insolvent if it fails any part of the test. In determining whether the value of the company's assets is greater than the value of its liabilities, the directors must consider the most recent accounts of the company, as well as all other circumstances that the directors know or ought to know affect, or may affect, the value of the company's assets and the value of the company's liabilities. The directors may also rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

According to the Law, "debts" includes fixed preferential returns on shares ranking ahead of those in respect of which a distribution is made (except where that fixed preferential return is expressed in the company's memorandum or articles as being subject to the power of the directors to make distributions) but does not include debts arising by reason of the authorisation. "Liabilities", on the other hand, includes the amount that would be required, if the company were to be dissolved after the distribution, to repay all fixed preferential amounts payable by the company to members, at that time or on earlier redemption (except where such fixed preferential amounts are expressed in the company's memorandum and articles as being subject to the power of directors to make distributions), but, subject to the definition of "debts", does not include dividends payable in the future.

Consequential matters

If the directors cease to be satisfied on reasonable grounds that the company will, immediately after the acquisition is made, satisfy the solvency test, any acquisition made by the company is deemed not to have been authorised.

Where a distribution is made at a time when the company did not, immediately after the distribution, satisfy the solvency test, it may be recovered by the company from the member, except to the extent that:

-     the member received the distribution in good faith and without knowledge of the company's failure to satisfy the solvency test;

-     the member has altered his position in reliance on the validity of the distribution; and

-     it would be unfair to require payment in full or at all.

Where a company has acquired its own shares, those shares will be immediately cancelled and the amount of the company's share capital reduced accordingly, unless as permitted by the company's constitution, the directors resolve to retain them as treasury shares.

For the purposes of Guernsey law, an acquisition of own shares will generally constitute a distribution for purposes of income tax unless, and to the extent that, it is a repayment of capital to the member or the amount of value of any new consideration given by the member for that distribution. A non-Guernsey tax-resident shareholder will not generally be subject to any Guernsey tax on receipt of a distribution arising from an acquisition by a Guernsey company of its own shares (save when they are held through a permanent establishment in Guernsey).