The purchase of own shares (buy back) is a financial practice that allows a company to buy back its own shares previously placed on the market. This operation is not only a way to manage the company’s capital, but is also governed by specific regulations that establish the terms and constraints. Let’s find out more about this strategy and the reasons why companies choose to undertake it.
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Definition and regulations
The purchase of treasury shares is regulated by Article 132 of Legislative Decree No. 58 of February 24, 1998, in line with Article 2357 of the Italian Civil Code. These regulations stipulate that the purchase must be made within the limits of distributable profits resulting from the latest approved financial statements. In addition, only fully paid shares may be purchased.
A key aspect is that the shareholders’ meeting must authorize the purchase, defining specific procedures, the maximum number of shares to be repurchased, and the duration of the authorization, which cannot exceed eighteen months. It is also important to note that the par value of the shares purchased may not exceed one-fifth of the share capital, also considering shares held by subsidiaries.
The reasons for a company to go ahead with the purchase of its own shares can vary. Some of the main reasons include:
- Supporting the stock price: Repurchasing treasury shares can help maintain or increase the value of the shares in the market.
- Defending corporate control: By limiting the entry of “unwelcome” shareholders into the share capital, the company can preserve its governance.
- Strategic exchanges: Repurchased shares can be used as a bargaining chip in merger or acquisition transactions with other companies.
- Planned capital reduction: Prior to a reduction in share capital, buying back own shares can be a preparatory strategy.
One of the main reasons a company decides to purchase its own shares is the possibility of reducing its share capital. This process must be approved by the shareholders’ meeting and results in the purchased shares subsequently being redeemed and cancelled. Reducing share capital can be useful in situations where the company wishes to optimize its capital structure.
Who can purchase treasury stock?
The purchase of treasury shares must comply with specific constraints. The company may not purchase except within the limits of distributable profits and available reserves, as shown in the latest approved financial statements. Only fully paid-up shares can be subject to repurchase.
According to current regulations, specifically Article 2357c of the Civil Code, companies are prohibited from underwriting their own shares. The purpose of this prohibition is to prevent a fictitious increase in share capital, which would not correspond to a real increase in the company’s assets. Subscribing own shares could lead to distortions in financial statement practices and make asset management more complex.
As of January 1, 2016, treasury shares must be recorded in the financial statements at a value corresponding to their purchase cost. This is done through the recognition of a “Negative reserve for treasury shares in portfolio.” This reserve, pursuant to Article 2424 of the Civil Code, is included in the AX item of equity, thus correctly reflecting the company’s equity position.
Conclusion
The purchase of treasury stock is an important corporate management strategy governed by specific regulations. Understanding the modalities and rationale behind it is crucial for anyone involved in the financial world and for investors who wish to learn more about the dynamics of listed companies.
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Giuseppe Fontana
I am a graduate in Sport and Sports Management and passionate about programming, finance and personal productivity, areas that I consider essential for anyone who wants to grow and improve. In my work I am involved in web marketing and e-commerce management, where I put to the test every day the skills I have developed over the years.
