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In the March 2023 Federal Budget, new legislation was tabled that will impose a two per cent corporate level tax on share buybacks by Canadian public corporations, effective January 1, 2024. This would apply to the “net value” of the share buyback. The purpose of this tax is to encourage companies to invest their funds in their businesses and workers, as well as in the Canadian economy.
What is a share buyback?
A share buyback is a tool used by issuers to purchase their own shares in the marketplace which has the effect of reducing the issuer’s capital outstanding. When a share buyback occurs, share prices tend to increase as there are fewer shares available for purchase in public markets. The issuer’s annualized dividend rate as well as its earnings per share would be higher, which is good for the company and its shareholders.
A share buyback needs to be approved by the company’s Board of Directors in order to proceed, and the event must remain open for a period of 35 days.
Share buybacks are completely voluntary. If shareholders choose not to sell during the buyback period, they will hold proportionately more shares after the transaction has closed since they still own the same number of shares, but the number of issued and outstanding shares have decreased. This in turn increases share value.
Types of share buybacks
Normal course issuer bid (NCIB)
A public company repurchases its own stock in order to cancel it. Under the terms of a NCIB, issuers typically cannot purchase more than 10% of the issued and outstanding shares over a 12-month period. This type of buyback program is managed by a broker. Once the broker has purchased the shares, they send a notification through CDS to have Computershare cancel the shares and remove them from the register, reducing the shares outstanding.
Substantial issuer bid (SIB)
In this type of buyback, a company will typically purchase between 10 to 20 per cent of its shares. Due to the volume of shares and the potential to cause market volatility, SIBs are managed like a Tender Offer outside of the marketplace (i.e., TSX) and managed by depositaries, such as Computershare. In such a case, it is Computershare’s responsibility to notify all shareholders and present the cash offer on behalf of the issuer.
Registered shareholders are mailed the offer material by Computershare, while beneficial shareholders are notified about the offer through CDS, DTC, and their brokers. Beneficial shareholders can participate by contacting their broker and requesting that their shares be tendered to the SIB. All brokers tender their shares through a central depository (CDS or DTC), who in turn tender all beneficial shares to Computershare. Registered shareholders, on the other hand, tender their shares directly to Computershare by completing a Letter of Transmittal.
In both a NCIB and SIB, the share price is determined in a couple of ways. In a fixed auction, shares are repurchased at a fixed price. With a Dutch auction, shareholders can choose the price at which they would like to sell their shares from a selection of auction rates. However, if the strike price is lower than the price the shareholder selected, those shares would not be purchased under the terms of the offer and would be returned to the shareholder.
Once the shares have been validly purchased, Computershare will simultaneously cancel the shares purchased from the register and issue cash payments to all participants of the SIB.
In addition, if more securities are tendered to the offer than what the terms allow for, the share buyback will be prorated. This means shareholders are only permitted to sell up to a maximum number of shares according to their ownership percentage of the valid aggregate of shares tendered to Offer. The remainder of the shares that exceed their allotment are returned.
Computershare has extensive experience with share buybacks. If you are interested in learning more or are considering a share buyback prior to the two per cent tax coming into effect on January 1, 2024, please contact Jason Spasaro at jason.spasaro@computershare.com.