Share Buybacks and Other Transactions on Treasury Shares
Corporate and financial institutions with strong balance sheets and significant cash flows are tasked with capital-allocation decisions that require their executives to choose from an array of investment alternatives. These alternatives include the investment in their current businesses, the acquisition of other businesses and the return of capital to shareholders. The return of capital to shareholders via dividend distributions was the almost exclusive course of action in the 1970s. Another alternative is the return of capital via share repurchases. This alternative gained ground through the next two decades, and eclipsed dividend distributions during the dotcom revolution of the late 1990s and early 2000s. Share repurchases reflect a company's confidence in its long-term growth and profitability. In this chapter I will focus on share repurchases, or share buybacks, analyzing the main strategies used by companies engaged in these programs.
A company can purchase its own shares provided that it is authorized to do so by its articles of association (i.e., bylaws) and complies with certain statutory formalities. It must be authorized by the company's shareholders by an ordinary resolution. The authority commonly specifies the maximum number of shares which may be purchased, the maximum and minimum prices which may be paid and the date on which the authority will expire.
Normally, shares which are purchased by the issuer ...