21.1 INTRODUCTION
Under the old Companies Act the buy-back procedure was quite a common procedure for companies to repay capital to their shareholders. Where the directors have made the decision that the company has excess cash and can pay it back to shareholders the obvious thing to do is to pay the capital back to shareholders by buying back shares instead of paying a dividend which is taxable. The buy back in South Africa was not always available under the old act and came about because of changes to the law.
The purpose of this section is to deal with the law and not to go through all the commercial reasons as to why a buyback procedure should be followed. There are in fact numerous commercial reasons as to why buybacks are carried out. Clearly there must be sound commercial reasons for a buy back! For a detailed discussion of the reasons and motivation please refer to Contemporary Company Law by Cassim on page 294. It is important that where a professional company secretary carries out this procedure on behalf of clients that there are sound reasons for doing so.
It is also very important to obtain the correct tax advice as it is so easy for some of the buyback to be viewed as a dividend by SARS.