For owners of private companies, buying back shares from a specific shareholder, rather than from everyone equally, can be one of the cleanest ways to handle a founder exit, resolve a shareholder dispute, or simplify the ownership register.
Key takeaways
- A selective buy-back targets one shareholder rather than the whole register, so the Corporations Act imposes extra safeguards.
- Approval is the critical step: a special resolution with the seller and their associates excluded from voting, or a unanimous resolution of all ordinary shareholders.
- Documents must be lodged with ASIC before the notice of meeting goes to shareholders, and a waiting period applies before the agreement can be entered into.
- The payment is usually split between a capital component and a (potentially franked) dividend component, which is what drives the seller’s tax outcome.
This is known as a selective share buy-back, and while it’s a useful tool, it comes with a specific legal process under the Corporations Act 2001 (Cth) that needs to be followed carefully.
This article explains what a selective buy-back is, when it tends to be the right solution, the key requirements your company will need to satisfy, and how the payment is taxed in the exiting shareholder’s hands.
What is a selective share buy-back?
A share buy-back is where a company purchases its own shares from a shareholder and then cancels them, reducing its issued share capital.
The Corporations Act recognises five types of buy-back, each with its own procedural requirements:
| Type | Who it is offered to |
|---|---|
| Equal access | All shareholders in a class, on the same terms. |
| Selective | One shareholder, or a chosen few. |
| Employee share scheme | Shares issued under a qualifying employee share scheme. |
| On-market | Listed companies buying through the exchange. |
| Minimum holding | A shareholder’s entire holding, where it is less than a marketable parcel. |
Because a selective buy-back treats shareholders differently, the law imposes extra safeguards to protect the interests of shareholders who aren’t part of the deal, and of the company’s creditors.
When is a selective buy-back useful?
Selective buy-backs are a common feature of private company life. Typical scenarios include:
- A founder or director exit: buying out a departing founder’s stake without requiring an offer to every other shareholder.
- Resolving shareholder disputes: providing a clean exit mechanism for a shareholder who no longer wants to be involved, avoiding a protracted dispute.
- Deceased estate or retirement planning: buying back shares from a deceased shareholder’s estate, or a retiring shareholder, without disturbing the rest of the register.
- Simplifying the cap table: removing a small or inactive shareholder ahead of a capital raise, sale process, or restructure.
- Employee share scheme unwinds: buying back shares issued to an employee or executive whose role has ended, where the arrangement isn’t structured as a standard employee share scheme buy-back.
In each case, a selective buy-back allows the company to deal with one shareholder’s position directly, rather than running a company-wide offer that isn’t practical or appropriate for the situation.
Buy-back or share sale? Choosing the right route
A buy-back is not the only way to remove a shareholder. The alternative is a straightforward transfer, where the continuing shareholders (or a new investor) buy the shares personally. The right choice usually turns on who has the money and what the parties want the register to look like afterwards.
| Consideration | Selective buy-back | Share transfer |
|---|---|---|
| Who pays | The company, from its own funds. | The buying shareholders, personally. |
| Effect on register | Shares cancelled; remaining holders’ percentages rise automatically. | Shares change hands; total issued capital unchanged. |
| Process | Corporations Act procedure, shareholder vote, ASIC lodgement. | Share transfer form and board approval, subject to the constitution. |
| Seller’s tax | Often split between dividend and capital components. | Generally a straightforward CGT event. |
Where the continuing shareholders don’t have surplus cash personally but the company does, a buy-back is often the practical answer. Where the parties want to preserve the existing capital base, a transfer may be simpler.
Key requirements to satisfy
Selective buy-backs are governed by Part 2J.1 of the Corporations Act, and the process is more involved than an equal access buy-back. The overarching requirement in section 257A is that the buy-back must not materially prejudice the company’s ability to pay its creditors, and the company must follow the prescribed procedures.
1. Shareholder approval
The terms of the buy-back agreement must be approved before it’s entered into, by either:
- a special resolution (at least 75% of votes cast), with the selling shareholder and their associates excluded from voting; or
- a unanimous resolution of all ordinary shareholders.
This requirement applies to a selective buy-back whether or not it falls within the “10/12 limit” (the threshold of 10% of the smallest number of votes attaching to voting shares at any time during the previous 12 months). For other buy-back types, staying within that limit reduces the approval requirements; for a selective buy-back, it does not.
The voting exclusion matters most in founder-heavy companies. If the departing shareholder holds a large stake, the remaining shareholders need to be able to muster enough votes on their own to pass the resolution.
2. Full and fair disclosure
The notice of meeting must be accompanied by a statement setting out all information known to the company that is material to how shareholders should decide to vote, including the buy-back terms, the rationale, the price, how the price was determined, and any effect on control of the company.
“Effect on control” is easy to overlook. Cancelling one holding lifts everyone else’s percentage, and that can push a shareholder through a threshold in the constitution or shareholders’ agreement, or simply hand someone effective control. It needs to be disclosed.
3. Solvency and creditor protection
The buy-back must not materially prejudice the company’s ability to pay its creditors.
Directors should review the company’s current liabilities, cash-flow forecasts and expected commitments before approving the transaction, and document the basis for their conclusion in the board minutes.
Although a statutory solvency declaration is not generally required, a properly documented solvency assessment is an important part of managing the directors’ duties and insolvency risks, including personal liability for insolvent trading.
4. Director duties
Directors must act in good faith, for a proper purpose, and in the company’s best interests when proposing and approving the buy-back, separate from the shareholder vote itself. A buy-back used mainly to entrench one faction, or priced to favour a departing director, invites challenge.
5. Constitution and shareholders’ agreement
The company’s constitution and any shareholders’ agreement should be reviewed before proceeding.
These documents may contain transfer restrictions, pre-emptive rights, valuation procedures, consent requirements or exit provisions that affect the proposed buy-back. Pre-emptive rights in particular can require the shares to be offered to existing shareholders first, which changes the sequence entirely.
6. ASIC lodgement and timing
The notice of meeting and the documents accompanying it, including the proposed buy-back agreement, must be lodged with ASIC before they are sent to shareholders.
A statutory waiting period, generally 14 days from lodgement, must then pass before the company enters into an unconditional agreement or completes the buy-back. Your adviser will confirm the exact lodgement sequence and current ASIC forms for your buy-back type.
Following completion, the shares are cancelled and the company must update its register and notify ASIC of the cancellation within the prescribed period.
7. Documentation
A well-run selective buy-back is supported by a clear paper trail: board minutes, the solvency assessment, the notice of meeting and accompanying statement, the buy-back agreement itself, the shareholder resolution, the ASIC lodgements, and the updated register.
This documentation is important not just for compliance, but to demonstrate that directors acted responsibly if the transaction is ever questioned later.
The process, step by step
- Review the constitution and shareholders’ agreement for pre-emptive rights, valuation mechanisms and exit provisions.
- Agree the commercial terms with the exiting shareholder, including price and payment timing.
- Model the tax and accounting outcomes before the price is locked in (see below).
- Prepare the board papers, including the solvency assessment and cash-flow review, and pass the board resolution.
- Draft the buy-back agreement and the notice of meeting with its accompanying disclosure statement.
- Lodge with ASIC before sending the notice to shareholders.
- Send the notice and hold the meeting, observing the voting exclusions.
- Observe the waiting period, then enter into the agreement and complete the buy-back.
- Cancel the shares, update the register, and notify ASIC.
Tax and accounting considerations
For tax purposes, a private-company selective buy-back will generally be treated as an off-market share buy-back, governed by Division 16K of the Income Tax Assessment Act 1936. The payment received by the exiting shareholder is divided into:
- a capital component, generally reflecting the amount debited to the company’s share capital account; and
- a dividend component (the balance of the purchase price), which may be frankable subject to the relevant tax rules.
This split is what drives the seller’s after-tax position. A shareholder on the top marginal rate receiving a largely franked dividend is in a very different position from one receiving mostly capital proceeds eligible for the CGT discount.
Several further issues need attention:
- Capital gain or loss. The buy-back triggers a CGT event for the exiting shareholder. The capital proceeds are reduced by the dividend component so the same amount isn’t taxed twice.
- Non-arm’s-length pricing. Special rules can substitute market value for the agreed price where the buy-back is not at arm’s length, or where the capital and dividend components are not commercially supportable.
- Franking. The company must have sufficient franking credits, and must consider the benchmark franking percentage and the anti-streaming rules, which can deny or cancel franking benefits where credits are directed to the shareholders who value them most.
- Share capital account integrity. Crediting amounts to the share capital account that did not come from share issues can “taint” the account and trigger adverse consequences.
- Related-party arrangements. Division 7A and other integrity provisions should be considered where the transaction involves separate loans, payments, debt assignments or benefits provided by the company to shareholders or their associates.
- Duty. Cancelling a holding increases the remaining shareholders’ proportional interests, which can have landholder duty implications in some states where the company holds land.
- Accounting. The entries reduce share capital and, where applicable, retained earnings, with a corresponding effect on the balance sheet and any banking covenants tied to it.
These outcomes should be modelled before the price and terms are finalised. The same headline buy-back price can produce significantly different after-tax results depending on how the transaction is structured.
Common mistakes to avoid
- Signing the agreement before the vote. The terms must be approved before the company enters into the buy-back agreement, not ratified afterwards.
- Letting the exiting shareholder vote. Their votes, and those of their associates, must be excluded from a special resolution.
- Sending the notice before lodging with ASIC. The order is fixed and getting it wrong can invalidate the process.
- Agreeing a price before modelling the tax. The headline number means little until the capital and dividend split is known.
- Overlooking the constitution. Pre-emptive rights and valuation clauses can override the commercial deal the parties thought they had.
- Treating solvency as a formality. An undocumented assessment offers directors no protection if the company later fails.
Getting the process right
Because a selective buy-back affects some shareholders differently from others, and because it directly reduces the company’s capital, getting the sequencing right (board approval, disclosure, ASIC lodgement, shareholder vote, waiting period, and completion) is essential. Missing a step, or getting the voting exclusions wrong, can put the validity of the whole transaction at risk.
If your company is considering a selective buy-back, whether to manage a founder exit, resolve a dispute, or tidy up your ownership structure, we’d recommend getting advice early, so the commercial terms, tax outcomes, and legal process are all aligned from the start.
Considering a shareholder exit?
Before agreeing on a price, it is important to understand how the payment may be divided between capital and dividend components, whether sufficient franking credits are available, and how the buy-back will affect the company’s cash flow.
We can model the tax and accounting outcomes and work alongside your legal team to help ensure the transaction is structured correctly from the outset.
You can read more about our business advisory and tax services, or get in touch to arrange an initial discussion about your proposed share buy-back.
This article provides general information only, is current as at the date of publication, and does not constitute legal or financial advice. Please contact our team to discuss how these rules apply to your specific circumstances.
Frequently asked questions
What is the difference between an equal access and a selective share buy-back?
An equal access buy-back is offered to every shareholder in a class on the same terms. A selective buy-back is offered to one shareholder, or a chosen few. Because a selective buy-back treats shareholders differently, it carries additional safeguards, most importantly a special resolution excluding the seller’s votes, or a unanimous resolution of all ordinary shareholders.
Can the exiting shareholder vote on a selective buy-back?
Not on a special resolution. Where the buy-back is approved by special resolution, no votes may be cast in favour by the shareholder whose shares are being bought back, or by their associates. The alternative is a unanimous resolution of all ordinary shareholders, in which case the seller does participate. This exclusion is one of the most common procedural traps in founder-heavy companies.
How is a selective share buy-back taxed in Australia?
A buy-back by a private company is generally treated as an off-market share buy-back under Division 16K of the Income Tax Assessment Act 1936. The purchase price is split into a capital component (the amount debited to the share capital account) and a dividend component, which may be frankable.
The buy-back also triggers a CGT event for the exiting shareholder, with the capital proceeds reduced by the dividend component so the same amount is not taxed twice. Special rules can substitute market value where the transaction is not at arm’s length.
Does a selective share buy-back need ASIC approval?
ASIC does not approve the buy-back, but lodgement is mandatory. The notice of meeting and its accompanying documents, including the proposed buy-back agreement, must be lodged with ASIC before the notice is sent to shareholders. A waiting period, generally 14 days, then applies before the company can enter into the agreement. The share cancellation must also be notified to ASIC after completion.
How long does a selective share buy-back take?
It depends on how quickly the commercial terms are agreed, but the statutory steps set a floor. Once the documents are lodged with ASIC, a waiting period of generally 14 days applies before the agreement can be entered into, and the notice period for the shareholders’ meeting runs alongside that. Allowing four to six weeks from finalised terms to completion is a realistic starting point, with valuation, tax modelling and constitutional reviews often taking longer than the statutory process itself.
