Thai Listed companies have several strategic options for returning excess liquidity or capital to shareholders, including dividends, capital reductions, and share repurchases. These methods not only enhance earnings per share (EPS) but also strengthen market confidence. Each of these approaches is governed by specific legal requirements designed to protect the rights and interests of shareholders and creditors.
- Dividends: Companies can distribute dividends from their distributable profits, either in cash or stock. While annual dividends require shareholder approval, interim dividends can be approved by the board of directors, as outlined in the company’s Articles of Association.
- Capital Reduction: A company may return excess capital to shareholders via capital reduction, which cannot exceed three-fourths of the company’s current paid-up capital. This can be done by either canceling a portion of issued shares or reducing the par value of the shares. A special resolution from shareholders is required, and creditors must raise no objections within two months of the resolution notice.
- Share Repurchase: Companies with retained earnings can use surplus liquidity to repurchase shares from shareholders, provided the total amount does not exceed the company’s distributable profits. Shareholder approval is required for repurchases, except when repurchased shares do not exceed 10% of the company’s paid-up shares. In such cases, if the company’s Articles of Association empower the board of directors, the repurchase can be approved by the board of directors alone, without shareholder approval.
Companies must ensure their shareholder distributions comply with legal requirements while carefully considering their financial position and the interests of both shareholders and creditors, including accounts payable and bondholders.
Differences and Key Considerations: Share Repurchase vs. Capital Reduction
- Distributable Profits: A company must have sufficient distributable profits and liquidity to fund a share repurchase. Retained earnings must be allocated to cover the cost of repurchased shares until they are either resold or canceled. This ensures that dividends are paid only from genuinely distributable profits. This requirement is particularly important for safeguarding creditors’ interests, as they cannot object to a share repurchase. In contrast, creditors have the right to object to capital reductions, ensuring that any outstanding debts are settled before the company proceeds with reducing its capital.
- Cancellation of Repurchased Shares: A company is prohibited from canceling repurchased shares until the end of the resale period outlined in its public resale plan. The primary purpose of share repurchase regulations is to enable companies to manage surplus liquidity, rather than to reduce capital. However, if the company determines that the resale plan—or an extension of the resale period, as permitted by law—is not in the best interest of the company or its shareholders, it must proceed with canceling the shares at the end of resale period, thereby reducing its capital accordingly. By law, the company is required to wait at least three months after completing the repurchase plan before initiating the resale process. The resale period can last up to three years, although the company has the flexibility to set a shorter resale period. Once the designated resale period has ended, the company is permitted to cancel the repurchased shares immediately. In this regard, the company must carefully consider the potential impact on foreign ownership limits or the shareholding limit of a single shareholder, as dictated by laws and regulations governing its business licenses or tax privileges. This consideration is crucial for protecting the best interests of the company and all shareholders. Furthermore, if shareholders reach or exceed the threshold that triggers a tender offer requirement after the company cancels its repurchased shares, they are prohibited from acquiring additional shares. Should they acquire more, they will be required, under the Takeover Code, to make a tender offer for all shares of the company.
- New Share Issuance: A company with an ongoing repurchase plan may pass a resolution to increase its registered capital and register the change with the relevant authorities. However, it is prohibited from offering new shares for sale until all repurchased shares have been fully sold or cancelled. This restriction on new share issuance does not apply to companies undergoing a capital reduction or to the allocation of new shares for the exercise of warrants or convertible debentures issued prior to the commencement of the repurchase plan.
Given the complexities of capital reduction and share repurchase processes, careful planning, sound financial strategies, and legal compliance are crucial to achieving financial goals and maintaining shareholder trust.
Financial Health for Repurchase Plans
Repurchase plans for financial management necessitate a thorough analysis of a company’s financial position. To fund the repurchase without jeopardizing its ability to meet upcoming debts, the company must have adequate retained earnings and liquidity. The plan should be based on the company’s most recent separate financial reports, not the consolidated ones. If the separate financial report indicates insufficient retained earnings or liquidity, the plan cannot proceed. Audited or reviewed financial reports from a certified auditor are the most reliable sources for this analysis. If the latest audited or reviewed report is outdated, the current managerial financial report should be taken into account to ensure the company’s financial health is accurately assessed.
Repurchase Methods and Prices
When repurchasing shares up to a limit of 10% of its total issued shares, a listed company can choose between making a general offer to all shareholders or conducting the repurchase through the Stock Exchange of Thailand (“SET”). However, both methods cannot be used simultaneously. If the repurchase exceeds 10%, only the general offer method is allowed. Furthermore, the repurchase period through the SET is restricted to a maximum of six months, while the general offer method is limited to a period of no more than 20 days, with a minimum of 10 days.
The repurchase price via the SET is capped at 115% of the average closing price over the last five trading days, ensuring the transaction aligns with market conditions and prevents price manipulation. For general offers, the purchase price must be uniform for all shareholders within the same class. While specific price ranges for general offers are not regulated, selecting an appropriate price is vital to ensure the repurchase enhances both financial performance and shareholder value.
Insider Trading, Related Party Transactions, and Anti-Takeover
Repurchase and resale plans are considered price-sensitive information. As such, directors, management, and employees with access to this information are prohibited from trading the company’s shares or disclosing these details prior to their public announcement. Listed companies must also disclose board and shareholder resolutions regarding repurchase plans through the SET electronic system following meetings.
Additionally, listed companies are prohibited from repurchasing or reselling shares during periods when inside information is being withheld or when they are aware that such transactions involve related parties. To mitigate conflicts of interest related to insider trading and related-party transactions, a listed company may appoint an independent third-party brokerage to execute repurchase and resale plans. While outsourcing these activities may offer a safe harbor, the company must still assess risks to ensure transparency and minimize the potential for market abuse in these transactions.
Moreover, share repurchases are prohibited if they interfere with potential takeover activities or could be perceived as anti-takeover measures, unless shareholder approval is obtained.
Resale Methods and Prices
Repurchased shares may be resold through various methods, including the SET, rights offerings, sales to directors, management, and employees (Employee Stock Ownership Plans, or ESOP), public offerings, or a combination of these methods. The board of directors should evaluate which resale method provides the greatest benefit to the company, ensuring full compliance with applicable regulations. This includes approval procedures, pricing determination, resale periods, and timely disclosure of information.
For resale prices through the SET, a listed company is prohibited from selling shares at a price below 85% of the average closing price over the last five trading days. In the case of resale through an ESOP, if the resale price is below market value, a special resolution from the shareholders’ meeting is required. This resolution must be approved without a veto from shareholders holding more than 10% of the total votes cast by those present and entitled to vote.
Upcoming Changes to Share Repurchase Regulations
The Department of Business Development under the Ministry of Commerce is proposing a revised regulation to streamline the share repurchase process. These revisions are designed to provide listed companies with more flexibility to use share repurchases as a tool to enhance share prices and restore market confidence, particularly in light of the prolonged bear market on the SET. Key proposed amendments include:
- Removal of the 6-month waiting period before initiating a new repurchase plan.
- Extension of the resale period from the cap of three years to five years when the market price exceeds the average repurchase cost, subject to shareholder approval.
- An additional one-year extension for resale if shares cannot be sold within the five-year period, subject to shareholder approval.
These changes aim to make it easier for companies to implement repurchase plans and adjust to market conditions more quickly when the market price still fails to reflect the company’s true value.
Conclusion: Strategic Considerations for Listed Companies
While share repurchases are an effective short-term strategy to increase stock value, companies must consider the long-term implications. Effective repurchasing strategies can enhance shareholder value and improve capital structure, but companies must evaluate their financial health carefully to avoid negatively impacting long-term growth, business expansion, or investments in new projects.