Share repurchases and the protection of shareholders* KATHLEEN VAN DER LINDE**
1 Introduction
From a creditor’s perspective there is not much difference between the payment of a dividend in respect of a share and a payment for the acquisition or repurchase of that share. However, from the point of view of the shareholder a dividend is a return on capital while a repurchase is a return of capital to the vendor shareholder. Share repurchases change the structure of the company’s share capital and consequently also the allocation of rights among shareholders.1 A repurchase combines a distribution to the selling shareholder with an increase in the relative stakes of the non-selling shareholders.2 Alternatively, a repurchase has also
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They are coerced into either accepting the offer and giving up a part of their interest in the company, or rejecting it and facing an increase in the relative size of their shareholding.7 If the company has more than one class of shareholders a proportionate repurchase in a specific class of shareholders can still result in unfair treatment among different classes. Even in a company with a single class of shares, a proportionate offer may have a discriminatory effect if the intention is that particular shareholders will not accept the offer.8 For example, in a going private transaction a company’s management or controllers could use a share repurchase as a way of increasing their own shareholding to a level where they are able to freeze out the remaining shareholders by compulsorily acquiring their shares.9 Similarly, in an empowerment transaction the idea may be to repurchase shares from shareholders other than black investors so that the resultant stake of the black investors is increased.10
Shareholder protection can be achieved in different ways. Some jurisdictions prescribe procedural requirements for repurchases while others rely primarily on substantive principles of fairness. Takeover regulation often addresses the use of repurchases as takeover mechanisms or as defensive strategies. I make some reference to shareholder protection in the context of takeovers,
In the open market share repurchase, the firm may or may not declare the repurchase. Depending on the market condition and the firm’s position in the industry, the firm can decide when and how many
Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.
capital gains for cash received, on the other hand, they can enjoy the profit when share
* a. Determining the allocation of amounts paid to the repurchased shares and other elements of the repurchase transaction
The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.
2. Companies buy back shares on the open market over an extended period of time.
When a company generates a profit, management has one of two choices: They can either pay it out to shareholders as a cash dividend, or retain the earnings and reinvest them in the business.
Repurchasing shares with a 40% debt to total capital ratio would increase shareholder value, however repurchasing shares with an 80% debt to total capital ratio would significantly decrease shareholder value and therefore would not be advisable. Increasing debt increases shareholder value to a certain point. As this proforma shows, the point of diminishing return is somewhere between 40% and 80%.
4) The firm will pay the dividend to all shareholders of record on a specific date, set by the board, called the ________ date.
Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.
a) Profit Sharing: return of some company’s profit to employees in the form of cash bonus or retirement supplement.
Dividend Policy | -Pay out dividend to shareholders in profitable period | -100% plowback to reinvest in the business |
Another factor for management to consider would involve the clientele effects. Presently the Wrigley family controls 21% of common shares and 58% of Class B common stock. Assuming the Wrigley family do not sell any shares, the repurchase will raising their voting control from 46.6% to a majority control over voting rights at 50.6% (see appendix2.2). This isn’t deemed significant as the Wrigley family already previously possessed majority of voting rights
The instructor may vary the emphasis on different issues by altering the study questions and by the choice of video clips. The case is well suited for courses and classes concerning corporate governance, valuation, mergers and acquisitions, and corporate social responsibility. The following objectives of the case allow students to:
First, a large share repurchase will significantly increase shareholders’ percentage ownership of BKI. BKI has been under levered for decades. The company acquisitions of several small manufacturers made shareholders’ equity be diluted even more. In other words, shareholders, especially the main shareholders in Blaine’s board, are paying for BKI’s over-liquidity. This share repurchase will not only give the board more flexibility to allot dividends, but will lead to a stable development of BKI’s business in the long run.