On the 19^th of April 2024, Bill 96, the Companies (Amendment) Bill (the “Bill”) was published. The Bill proposes to amend the Companies Act (Chapter 386 of the Laws of Malta) (the “Companies Act” or the “Act”) in a number of ways but perhaps the most important amendments proposed regard the much-awaited clarification of the Share Buy-Back and Reduction of Share Capital provisions which are found in our Companies Act.

As things stand today, there is some confusion among practitioners with regard to the corporate procedure to be implemented by a company wishing to acquire its own shares and the instances when a company must undergo a reduction of share capital as a result of such acquisition. The law has been pining for clarification for a while now.

Currently, share buy-backs are mainly regulated under articles 105 to 108 of the Companies Act and reductions of share capital under article 83 of the Act.  This Article seeks to compare and contrast the current legal position with what is proposed in the Bill, although it must be said that the Bill is still in its early stages.

(i) “Share buy-backs” or the acquisition by a company of its own shares

In article 105, the law sets out the premise that a Company may not subscribe for its own shares, whether on original subscription or on any subsequent subscription. Article 106 of the Companies Act however provides certain conditions wherein a company can in fact acquire its own shares (other than by subscription) with the result that the company will indeed be able to purchase or acquire and hold its own shares.

The stringent cumulative conditions to effect a share buy-back under Article 106 include that:

• the particular company’s Memorandum and Articles of Association authorise the acquisition by the company of its own shares;
• authorisation is given by an extraordinary resolution (as regulated in terms of law) which should designate the agreed terms and conditions of such acquisitions. Any shares already held by the company do not carry voting rights for the purpose of any such resolution;
• the nominal value of the acquired shares and any shares already held by the company, must not exceed 50% of the issued share capital of the company and the shares acquired must be fully paid up shares;
• no acquisitions by a company of its own shares can 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 called  up  issued  share  capital  plus the company’s undistributable reserves;
• it is not possible for the company to acquire any  of  its  own  shares  except  out  of  the proceeds of a fresh issue of shares made specifically for  the  purpose,  or  out  of  profits  available  for distribution; and
• a company may not as a result of the acquisition of any of its shares become the sole holder of its ordinary shares.

These conditions must be satisfied to effect a share buy-back in terms of article 106 of the Act except that, when the acquisition of the company’s own shares is necessary to prevent serious and imminent harm to the company, the extraordinary resolution requirement can be done away with.

Although share buy-backs in private companies are a useful exit route for a shareholder, these stringent conditions exist as a capital maintenance protection mechanism for the benefit of creditors since the purchase by a company of its own shares could diminish the capital fund of the company. Therefore, if the appropriate financial conditions are not satisfied, the share buy-back cannot take place. There is an exception to this in article 107 of the Companies Act which allows for share buy-backs (without requiring the satisfaction of the majority of the conditions in Article 106 to apply) in instances when shares are bought back by the company in the course of a reduction of the issued share capital made in accordance with article 83 or if they are acquired by the company in any procedure for the conversion, amalgamation or the division of the company or during a redemption of preference shares. The amendments proposed to article 107, at least until now, are not material and mainly regard reference being made to the “cross-border” regulations for mergers, divisions and conversions of companies as well.

Article 107 implies that in every case, the shares which have been acquired by the company must eventually be disposed of or cancelled by the company. If shares are acquired in terms of article 107 of the Companies Act they must be cancelled in terms of the reduction of capital provisions which requires a three month notice period, giving creditors a right to contest such reduction of share capital, before the reduction of share capital can become effective.

In practice, when shares are acquired by a company in terms of article 106, they are often cancelled immediately (that is without going through a capital reduction process), even though the Companies Act is silent on this point. This makes sense because a share buy-back in terms of article 106 presumes that the company is in the required financial position to undergo a share buy-back and the conditions that seek to protect creditors of the company are satisfied. When those conditions cannot be met, however, it makes sense that the share-buy back and subsequent cancellation must follow the reduction of share capital rules which provide creditors with the “three-month creditor protection period”.

The Bill now proposes to explicitly regulate the position followed in practice by proposing a new sub-clause to article 106 which states that the company may at any time cancel any of the shares acquired in accordance with article 106 and that article 83 (which requires the waiting out of the three-month period before a reduction of capital via cancellation can take effect) will not apply to such cancellation of shares. Upon that cancellation becoming effective the amount of the issued share capital shall be reduced accordingly by nominal value of the shares cancelled and within fourteen days a notice has to be delivered to the Registrar for registration of such cancellation. Default of provision of that notice, may lead to penalties being imposed.

(ii) Reduction of Share Capital

Interestingly, the reduction of issued share capital clause, article 83 of the Companies Act, is proposed to be completely substituted with new provisions in the Bill. Although the current article 83, does not provide any context whatsoever to the reason why a company may decide to reduce its share capital, the newly proposed article 83 specifies that a company may, by extraordinary resolution of the general meeting reduce its issued share capital or undistributable reserves including for the purposes of creating a distributable reserve. This does not limit the reasons to undergo a reduction of share capital but provides guidance to at least one instance when a reduction should be undergone.

Although the current provision in force does not explicitly refer to the option of reducing undistributable reserves, article 114 of the Companies Act does state that the share premium account (which is an undistributable reserve of the company in terms of law) will be treated as issued share capital of a company in the context of a reduction of share capital. The proposed amendment in the Bill, sets the context and provides clarity to the provision. The proposed amendment also clarifies that a reserve arising from such reduction will then be treated as authorised profit for the purposes of Chapter XI of the Companies Act which regulates “Distribution of profits and assets”.

The proposed amendment to article 83 also specifies that a copy of the extraordinary resolution effecting the reduction of capital must be delivered by the directors or company secretary to the Registrar for registration. Although this is implied in the current provision which is in force today, if the Bill becomes law, such requirement would be explicitly stated.

The rest of the requirements under the reduction of capital provisions, including the fact that the reduction of capital shall only take place on the lapse of three months post the publication of a statement by the Registrar and the creditor contestation procedure, have by and large remained the same. It appears as if a new statutory form must also be filed on the reduction of share capital (except in specified instances) notifying the Registrar of such reduction within 14 days from the effective date of the reduction and default in filing same will result in an administrative penalty.

Conclusion

It will be interesting to see how the Bill develops during the next readings in Parliament and of course, the final form of the Act to be published in due course but it is (at least at this stage) looking like a step in the right direction for the obtaining of clarity on the procedure for share buy-backs and the reduction of capital of Maltese companies.