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the Hidden Value:

The Advantages of Share Buybacks in Corporate Transactions

In the realm of corporate transactions, the strategy of share buybacks often remains underappreciated and overshadowed by the more commonly pursued route of share sales. However, delving deeper into the dynamics of a share buyback reveals a myriad of advantages for both companies and shareholders alike. This blog explores some of the reasons why share buybacks warrant a closer look and how they can serve as a catalyst for unlocking hidden value or flexibility in corporate transactions.


Dilution Mitigation

In an environment where new shares are frequently issued, such as through Employee Stock Ownership Plans (ESOPs) or other arrangements, existing shareholders face the risk of dilution. By executing share buybacks, companies can counteract this dilutionary effect, thereby safeguarding the interests of their current shareholders and preserving the overall ownership structure. This is particularly important in circumstances where there is a bespoke shareholders agreement where operational control of the shareholders/directors is defined by percentage or number of shares.

Mutual Benefit for Shareholders

For shareholders seeking an exit strategy, a share buyback presents an attractive avenue to divest their shareholdings at fair market value. Unlike share sales, which rely on external buyers or other existing shareholders to source purchase funds, a buyback allows exiting shareholders to seamlessly liquidate their positions with minimal disruption to the company or fellow shareholders (save for compliance with a statutory process). This mutual benefit underscores the collaborative nature of share buybacks and can be used to align the interests of all stakeholders involved.

Capitalizing on undervaluation and ratification of share price

In periods of market downturn or when shares are perceived to be undervalued (in a private company, valuation can be a contentious issue), share buybacks can serve as a strategic tool for capital allocation and value ratification. By repurchasing their own shares at discounted prices, the company is able to signal confidence and a line marker in their intrinsic value while simultaneously bolstering shareholder confidence (or otherwise providing shareholders with a confidence in a value, provided of course the value has an objective basis). Furthermore, by reducing the supply of outstanding shares, buybacks can exert upward pressure on share prices, potentially closing the valuation gap over time.

Flexibility in Capital Allocation

Executing share buybacks provides companies with greater flexibility in capital allocation. Unlike dividends, which commit companies to ongoing payouts, buybacks can be initiated, suspended, or adjusted based on prevailing market conditions, cash flow considerations, and strategic priorities.

Strategic Use of Excess Cash

In periods of ample liquidity or when companies have excess cash reserves, share buybacks offer an efficient mechanism for deploying surplus funds. By investing in their own shares, companies can signal confidence in their future prospects while simultaneously enhancing shareholder value. While CXT Legal exclusively works in the private market on transactions, the strategic use of excess cash in a private company is similar to that strategy used in public ASX entities which are awash with cash (think the recent Big Four banks with their on market buy backs in 2024 as a result of strong balance sheets).

Alignment with Executive Compensation

Share buybacks can align with executive compensation structures (such as bonus placements or ESOP plans), particularly those tied to earnings per share (EPS) or shareholder value metrics. By reducing the outstanding share count, buybacks can boost EPS figures, potentially incentivizing management to pursue value-enhancing strategies, even in the private market.

The above surmises some corporate and transaction law opportunities that have responded well to share buybacks on corporate mandates to which we have been engaged. 

At CXT Legal, we recognize the nuanced landscape of share buybacks and the value they can unlock for your company. Share buybacks also need to be carefully constructed having regard to a company’s constitute documents and in line with the statutory process prescribed by the Corporations Act 2001 (Cth) (‘Act‘), given the fact the Act prohibits a company from acquiring shares in itself except as permitted within the Act.

From navigating legal intricacies to advising on commercial positions, we can work closely with you and your advisors to account for your financial considerations. Our team is committed to empowering you with the insights and expertise needed to make informed decisions. If you’re looking to harness the advantages of share buybacks for your organization, we invite you to reach out to our award-winning corporate and transactions team and explore how we can assist you.

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Our dedicated team of corporate and commercial lawyers have all gained their experience working in significant private market transactions, advisory mandates and disputes.