The repurchase by a holding company of treasury shares held by subsidiaries: A South African perspective

N Wesson,W D Hamman

doi:10.4102/sajbm.v43i4.480

Abstract

This study aims to establish whether the repurchasing of treasury shares by a holding company is a regular occurrence for companies listed on the Johannesburg Stock Exchange (JSE); whether these repurchasing companies have complied with the relevant legal and reporting requirements; and what their stated motivations were for these repurchases.In a sample of 251 companies listed on the JSE from 1999 till their 2009 financial year-end, 120 (47,8%) companies executed share repurchases. Thirty-six (30%) of the 120 companies repurchased treasury shares from their subsidiaries in 55 different transactions, representing 22% of the total number of shares repurchased.Companies which repurchase treasury shares do not always comply with the legal requirements (such as obligatory Security News Agency (SENS) announcements and circulars); and the accounting requirements of International Financial Reporting Standards (IFRS) (relevant to the disclosure of the reconciliation of the number of shares in issue) are applied in an inconsistent manner in annual reports. The most common reason for the repurchase of treasury shares was that the 10% limit (on treasury shares held by subsidiaries) had nearly been reached. Various business purposes were also given. Income tax implications did not seem to be a conclusive motivation for repurchasing treasury shares.The repurchase of treasury shares by the holding company is not allowed in most other countries, like the UK, and presents unique challenges to the South African share repurchase environment. More stringent application of the JSE Listing Requirements, as well as better guidance on the IFRS disclosure requirement on the reconciliation of the number of shares in issue, is needed in South Africa. This will enable stakeholders to make better-informed decisions and will also assist research on share repurchases.This material is based upon work supported financially by the National Research Foundation. However, any opinions, findings, conclusions and recommendations expressed in this article are those of the authors alone, and the NRF does not accept any liability in regard thereto.

Highlights

Share repurchases were introduced in South Africa on 1 July 1999 in terms of Section 85 to 90 of the Companies Amendment Act, Act 37 of 1999 (RSA, 1999)
The present study aims to establish how many treasury shares were repurchased by companies listed on the Johannesburg Stock Exchange (JSE) during the period 1 July 1999 till December 2009
In an exploratory study by Bester et al (2010), the repurchase of treasury shares by the holding company was identified as a South African share repurchase method

Summary

Introduction

Share repurchases were introduced in South Africa on 1 July 1999 in terms of Section 85 to 90 of the Companies Amendment Act, Act 37 of 1999 (RSA, 1999). Companies may acquire their own shares, and subsidiaries may acquire up to 10% of the shares in their holding company in terms of the Act. The shares acquired by the subsidiaries are referred to as treasury shares for accounting purposes. The repurchase of treasury shares by the holding company does not occur in most countries In countries where these repurchases are allowed, the accounting, legal and income tax principles may differ from the South African principles

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