A company could opt for share buybacks for many different reasons, but the main reason is that its shares are undervalued and the company wants to increase demand. Share repurchases reduce the number of shares outstanding, which can increase the value of the stock and earnings per share (EPS). As a general rule, a company cannot return assets to its members when it is an ongoing business, with the exception of dividends paid on available profits. Since members of a limited liability limited liability corporation are liable, the law ensures that a company cannot return assets to its members to the detriment of its creditors, since those assets are intended to be used to pay creditors in the event of liquidation. As a result, a company cannot acquire its own shares and this prohibition is expressly provided for by the Corporations Act. Despite the general ban on share repurchases, the Companies Act authorizes a company to repurchase common shares and preferred shares if certain pre-established requirements are met. Share repurchase rules were introduced to provide companies with a useful and inexpensive opportunity to return cash to shareholders. Such share repurchases allow a company to be flexible in the temporality, procedure and amount of capital that must be returned to shareholders. This increases a company`s ability to adjust its capital structure and capital ratio and can improve a company`s return on investment for the benefit of shareholders. For the calculation of earnings per share, the company`s net income is divided by the number of shares issued.
By reducing the number of shares, the EPS will naturally increase. For example, if the company`s net income is $1 million and there are 10,000 shares pending, the EPS is $100. But if the company buys back some of its shares, the EPS will increase. The Companies Act contains appropriate safeguards, which have been formulated to ensure that share repurchases are not made to the detriment of shareholders and creditors. These include four methods that allow a company to acquire its own shares: in addition to the guarantee that the interests of creditors are preserved and are not affected by the return of capital, there are other reasons for prohibiting share buybacks from protecting shareholders from the risk of abuse by company executives, which may increase their voting rights when the company repurchases its shares or encourages the purchase of its own shares at excessive prices. The ban on share repurchases also protects the invested public from manipulation of the share price by companies that can use share buybacks to support their share prices.