Purchase of own shares - merger accounting, Business Law and Ethics

Purchase Of Own Shares:

Another possible way in which a company's paid-up capital may leave the company other than in the ordinary course of the company's business would be if the company purchased its own shares. It was therefore held in Trevor v Whitworth (48) that it is illegal for a limited company to purchase its own shares. Such a purchase, whether permitted, would constitute an indirect reduction of the paid-up capital with no compliance with the statutory provisions relating to reduction of capital. This is the general rule that is applicable in Kenya. This decision was said to be based on the implied provisions of the English Companies Act 1862. The said provisions were incorporated in the English Companies Act 1948 which in turn became our Companies Act (Cap. 486). It may however be criticized for its assumption that whenever a company buys its shares it would do so by utilizing its paid-up capital. It is in fact possible for a company to buy its shares without using its paid-up capital but using the money from a reserve fund which was constituted for that purpose. Such a purchase might in fact be beneficial to the company which could use it as a mechanism for propping up the market value of its shares at a time when there is panic selling by its shareholders which has been precipitated by adverse rumours about the company. The company would later resell the shares in such a way as to prevent high fluctuations in their market prices.

Posted Date: 1/12/2013 4:15:39 AM | Location : United States

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