At a recent Board meeting, the Board Chair of Mempeasem Ltd suggested the need to restructure the capital of their company. The Chair proposed shares repurchase as the option to consider but majority of the Board members were hearing this term for the first time. As the Finance Manager, you have been directed to help the Board members to understand this option for decision making.
Required:
i) Explain the term share repurchase to a non-finance person. (1 mark)
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Share repurchase is the process where a company buys back its own share from investors or from the stock market.
ii) Identify FOUR (4) situations under which share repurchase will be useful for Mempeasem Ltd. (5 marks)
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• Discourage unfriendly takeover: Shares repurchased can be used to enhance shareholder value or discourage an unfriendly takeover.
• Acquire another business: Companies can repurchase their own shares to be used for acquisition of another company.
• For employees share options: Where shares are used as part of employee salary package, a company can purchase its own shares for that purpose.
• For retirement: Companies can buy their own shares and retire the shares.
• Redistribution of excess cash: Companies with excess cash as a result of excessive retained earnings can redistribute the excess cash to shareholders through purchase of own shares.
• As part of agreement with investors (Share repurchase agreement): Where there is an agreement with an investor that the company will buy its shares from the investor after a given period, the company will have to comply with this agreement by purchasing its own shares from the investor. This is also referred to as share repurchase agreement.