This Article provides a general overview of the manner in which Maltese law regulates what is commonly known as a Share Buy-Back in the context of the Capital Maintenance Doctrine, with respect to private limited liability companies, incorporated in terms of the Companies Act 1995 (Chapter 386 of the Laws of Malta) (the "CA"). The notion that a company may not purchase its own shares except in certain specific circumstances is a general principle of Maltese Company law which has been transposed by the legislator in the provisions of the CA.
Many scholars nowadays question whether the traditional Capital Maintenance Doctrine still serves its essential purpose of providing the creditors of a company with a useful and necessary protection mechanism. This doctrine is essentially concerned with curtailing a company's liberty to freely return to its shareholders funds which were originally subscribed for shares, with a view to offer a measure of protection to the creditors and possibly to the minority shareholders of the company. The idea that a company should not be allowed to return capital to its shareholders at will is one of the basic elements of Maltese Company law. Capital Maintenance rules in general attempt to safeguard creditors and minority shareholders' interests by regulating the manner in which capital can be returned to the shareholders.
The Capital Maintenance Doctrine which finds it source in the landmark House of Lords decision, "Trevor v Whitworth" (1887) was initially developed by the English Courts in the 19th Century and later found its way into English Statute. It was also adopted into Maltese law as well as into the Second EC Company Law Directive 77/91/EEC (13th December 1976). In fact specific provisions on Share Buy-Backs were introduced into Maltese law by means of the CA in 1995 and closely reflect the provisions of the Directive.
Generally, Maltese Company law contains various Capital Maintenance rules. Essentially, in terms of these rules, a company may not purchase its own shares nor redeem its own preference shares except in certain specific cases. A company may also reduce its share capital only pursuant to the conditions set out by the law, it may only distribute dividends out of its distributable profits, and it may not provide any financial assistance for the acquisition of its own shares except as set out in the law.
Indeed the CA lays down a general prohibition against a company subscribing for any of its shares whether on original subscription or on any subsequent subscription. Article 106 of the CA however provides that a company may acquire its own shares other than by subscription, although it lays down a number of stringent conditions which need to be fulfilled in order for the company to engage in such an acquisition.
Firstly, the acqusition by the company of its own shares must be authorised by the memorandum & articles of association of the company. The acquisition must also be sanctioned by an extraordinary resolution of the company, which resolution should set out the terms and conditions of the acqusition, in particular the maximum number of shares to be acquired, the duration of the period for which the authorisation is given (which may not exceed eighteen months), and in the case of an acquisition for valuable consideration, the maximum and minimum consideration. The law provides that the rules within the CA dealing with extraordinary resolutions should apply to the afore-mentioned resolution, saving the fact that the shares in the company already held by the company itself are to be treated as carrying no voting rights.
A significant creditor safeguard set out by the CA is the fact that for a company to acquire its own shares, the nominal value of the said shares, including shares previously acquired by the company and held by it, should not exceed ten per cent of the issued share capital. Complementing this restriction are a number of other stringent conditions: (a) an acquisition by a company of its shares may not be made when on the closing date of the last accounting period, the net assets as set out in the company's annual accounts are, or following such distribution would become, lower than the amount of the issued shares and the company's undistributable reserves; (b) the shares acquired by the company must be out of the proceeds of a fresh issue of shares made specifically for the purpose, or out of profits available for distribution; (c) the shares being acquired must be fully paid up; and (d) the company may not become the only holder of its ordinary shares as a result of this acqusistion.
It should be noted however that where the acquisition of a company's own shares is necessary to prevent serious and imminent harm to the company, the law does away with the necessity of an extraordinary resolution. The same exception is also applicable in another specific situation, that is where the shares are acquired either by the company for distribution to that company's employees or to the employees of its parent company or of any of its subsidiary undertakings. Although no extraordinary resolution is necessary here, in this case the shares must be distributed within one year of their acquisition. It is interesting to note that apart from this latter time restriction, the CA does not compel a company which acquires its own shares in terms of the rules described above, to cancel or dispose of them within a specified time.
Apart from share buy-backs carried out within the afore-mentioned restrictive framework, there exist a number of circumstances pursuant to which, in terms of law, a company may acquire its own shares otherwise than by subscription and may dispense with most of the conditions discussed above. It is only the prohibition against the company becoming the sole holder of ordinary shares which remains applicable in these special circumstances.
These special circumstances which are clearly set out in Article 107 of the CA include cases where the shares are acquired by the company in the course of a reduction of its issued share capital, or are the subject of an application for shares in a public company which is revoked in accordance with Article 100 CA, or are surrendered or forfeited to the company, as well as situations where the shares in question are acquired in any procedure for the conversion, amalgamation or division of companies, or in any procedure for the change of status of a company from a private to a public company or vice- versa, or by the company pursuant to an order of the court made for the re-purchase of shares which are held by dissenting shareholders.
Such special circumstances also arise when the relevant shares are acquired by the company during a redemption of preference shares, or being fully paid up, are acquired by an investment company with fixed share capital or by another company forming part of the same group at the member's request (provided that such acquisitions shall not have the effect of reducing the company's net assets below the amount of the issued share capital plus any reserves the distribution of which is forbidden by law).
In the case of all the afore-mentioned 'special circumstances' except for a few, namely where the shares are acquired in the course of a reduction of the issued share capital, or during a redemption of preference shares, or by an investement company with a variable share capital or another company part of the same group as afore-said, the company is essentially allowed to retain the said shares for a period of thirty months from the acquisition but should it fail to dispose of them within this period it is bound to pass an extraordinary resolution cancelling the shares within six months of the expiry of the thirty-month period. It is interesting to note that the CA is silent on the fate of the acquired shares in the case of the special circumstances which are excluded from this time- restriction, as mentioned above.
In terms of Maltese Company law, the cancellation of shares mentioned in the previous paragraph is tantamount to a reduction in share capital and the provisions of the CA regulating such a reduction will be applicable. Indeed, pursuant to applicable laws relating to such a reduction, creditors of the company have the right to object to the said reduction within a period of three months and this right is naturally applicable here as well. However, in this specific case, should any creditors avail themselves of this right to object, the CA provides that the court may not disallow the cancellation of the shares, but if good cause is shown it may order that sufficient security be given to the creditor who has objected, either immediately or as soon as said security becomes available to the company, and in the meantime no distribution of dividends may be effected by the company.
Should the company fail to adhere to the obligation of cancelling the shares within the required time limit, any member or director of the company can apply to the court requesting the cancellation of the said shares. This requirement to dispose of or cancel the shares and the relative provisions mentioned above are however not applicable if the nominal value of the shares held by the company pursuant to any of the special circumstances outlined above does not exceed ten per cent of the issued share capital of the company.
The law also provides that shares which are acquired or held in contravention of Article 106 and 107 of the CA and are not disposed of within one year of their acquisition, should be cancelled within six months of the expiry of the said year. In such a case the provisions relating to a reduction to the issued share capital including the discretion of the court to order the company to give sufficient security to an objecting creditor are applicable. Here as well, should the company fail to comply with this requirement, any member or director of the company can apply to the court for an order to cancel the shares.
Finally, it is important to note two general rules emerging from the CA applicable during any given period of time that a company holds any of its shares, whether in terms of Articles 106 or Article 107 of the CA or even in contravention of these articles. As a means of ensuring even further capital protection, the CA provides that in the afore-mentioned cases the following two limitations apply: (A) the acquired shares will not carry any voting rights nothwithstanding the terms of company's memorandum and articles of association; and (B) should these shares be included in the assets of the company shown in the balance sheet, a reserve of the same amount, unavailable for distribution is to be included among the reserves.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
