The bylaws of a company or organization establish the structure, duties, and authority granted to a board of directors. Bylaws dictate how many members are elected, how many meetings are held, and when the board is convened. Depending on the firm or organization, its industry, and its shareholders, the number and structure of a corporation's board of directors can vary greatly. Most people agree that the board should have both internal and external members to represent shareholders and owners/management. Thus, the board of directors typically includes both an internal and external director. Although both the firm's internal and external directors reflect the interests of individuals who work for and for the company, the external director serves as a voice for those who have no connection to the company.

The two major types of shares that are considered to represent equity stock in a firm are known as common shares and preferred shares. Consequently, the terms "shares" and "stock" are commonly used interchangeably. Common stockholders not only have the ability to vote, but they also have the potential to profit from increases in the stock price and dividends. While preferred stock, as contrast to common stock, carries the ability to be redeemed at a more favorable price and pays dividends on a monthly basis. Even though most businesses have stock, the only shares that may be bought and sold on stock exchanges are those of publicly traded organizations.

 
Generally, companies can invest in themselves through stock buyback. To increase the proportion of shares held by investors, the total number of shares currently accessible on the market must be reduced. If a company believes that the market price of its shares is too low, it may choose to repurchase those shares in order to increase returns for investors. A buyback also increases the proportion of earnings allocated to each share, which is advantageous given the company's present operating forecast. The stock price will rise if the price-to-earnings ratio (P/E ratio) remains constant.

          
As a result of the share repurchase, the number of outstanding shares is reduced, resulting in a rise in the proportional value of each share that is still held. Earnings per share (EPS) of the stock will rise anytime either the price-to-earnings ratio (P/E) or the stock price rises. When a firm repurchases its own stock, it communicates to its shareholders that it has adequate financial reserves and is unlikely to face economic issues in the foreseeable future.

          
A repurchase could also be used to meet compensation requirements. Stock options and stock awards are frequently conferred upon executives and employees in a company. Firms buyback and distribute shares to employees and management to give incentives and options. Existing stockholders are protected from having their shareholding cut.

Firms repurchase shares for other purposes. Management may think the share has been oversold. Lower-than-expected earnings, an accounting crisis, or a bad economy might hurt a share's price. When a company spends millions buying back its own shares, it may mean management believes the price is overvalued.

Other than that,a company may repurchase shares to enhance its financial ratios, which investors use to value a company. Doubtful motive. If decreasing shares improves financial ratios rather than shareholder value, management may be at fault. Better financial ratios may be a benefit of a sensible corporate choice if a company's purpose for repurchasing is sound. What happens? Buybacks lower outstanding shares. When a company acquires shares, it cancels or keeps them as treasury shares, reducing outstanding shares.

Buybacks reduce balance sheet assets, such as cash. ROA rises as assets shrink; ROE rises as equity falls. Markets favor higher ROA and ROE.The stock repurchase boosts P/E. P/E is a widely utilized value indicator. The market generally prefers a lower P/E ratio. Assuming shares stay at $15, the P/E ratio is 75 ($15/20 cents). Following the buyback, the P/E ratio drops to 68 ($15/22 cents). Fewer shares times the same earnings result in higher EPS, which lowers P/E. Using the P/E ratio as a value metric, the company is now less costly per dollar of earnings than it was before the repurchase.

         
Next, share buyback is a kick for slow-growing companies. Many blue chips profit from regular buybacks that lower outstanding shares. Even for organizations with ordinary top- and bottom-line growth, the reduction can enhance earnings-per-share growth rates, leading to greater investor valuations and a higher share price.

In addition, share repurchases may be better for long-term wealth building because they boost earnings-per-share. Share repurchases are appealing because investors can defer taxation until the shares are sold. In contrast to dividends, buybacks allow gains to accrue tax-free until they are realized. Long-term non-taxable account performance may not differ much between stocks that pay rising dividends and those that repurchase shares. Non-taxable accounts aren't taxed. Moreover, Dividend payments are transparent, which is beneficial. Financial and investor relations websites both provide dividend information. Find buyback information by reviewing business press statements.

         
Last but not least, flexibility. Buybacks give the company and its stockholders more flexibility in changing markets. A corporation is not required to complete a repurchase programme within the designated term; if conditions are tough, it may slow buybacks to save money. Investors can choose when to sell shares and the resulting tax payment. This method isn't available for dividends because investors must pay taxes while filing their tax returns. Dividends are taxable. Even if a dividend-paying corporation can choose to reduce or eliminate dividends, investors perceive it negatively. If the dividend is cut, suspended, or abolished, shareholders may sell many shares.

Next, a corporation can make a tender offer to its shareholders to buy back their shares at a fixed date and price. The tender offer price will almost always be higher than the share price at the time of the offer. Next, shareholders who want to sell their shares must submit a proposal to the corporation. A predetermined price tender offer can usually speed up a stock buyback.

          
In a Dutch auction, a corporation offers to buy back shares and gives a range of prices. The company sets the minimum price of a range higher than the existing share price. Shareholders put bids by stating the minimum price at which they're willing to sell and the amount of shares. When it's time to conclude the repurchase programme, a corporation will analyze shareholder offers and choose an appropriate price from an established range. Dutch auctions allow companies to select buyback prices by talking directly with shareholders. This method allows the share repurchase programme to be completed quickly.

          
A corporation approaches significant shareholders immediately to buy back their shares. In this circumstance, a premium is added to the share price. This method allows a company to negotiate a buyback price directly with a shareholder. This makes this method potentially cost-effective in certain situations. Direct shareholder negotiations are time-consuming. 

1.    A tender offer is a sort of offer made to shareholders that allows them to sell some or all of their shares at a higher price than the price at which they are presently trading within a certain time frame. Investors receive this premium as compensation for selling their shares rather than retaining them.

2.    A company may even have a defined share repurchase programme in place that purchases shares at regular periods. Over a long period of time, companies repurchase shares on the open market.

A company can fund a repurchase with debt, cash on hand, or cash flow generated by operations. All of them are realistic alternatives. An enhanced share buyback is an expansion of a company's current programme to buy back its own shares. Increased share repurchases cause a company's share repurchase programme to progress more quickly, causing the company's share float to shrink at a faster rate. The extent of the share repurchase will determine its influence on the market. A big and widespread buyback is expected to result in a rise in the share price. 

The buyback ratio is calculated by dividing the total amount spent on buybacks during the preceding year by the company's market capitalization at the start of the repurchase period. The buyback ratio allows for a comparison of the prospective effects of repurchases across different firms. It is also a measure of a company's ability to return value to its shareholders, as companies that frequently repurchase their shares beat the market in the past. In other words, corporations that repurchase their stock regularly are more likely to be profitable.

The board of directors(BOD)  have a major role in the conditions for  purchase of company’s own shares and permitted share buybacks. The first condition is the Board's resolution and solvency statement.  At a board meeting, the Board of Directors (BOD) needs to pass a board's resolution in order to recommend to the general meeting that the firm buy back its shares before a share buyback can take place. According to California Civil Code section 127(2)(c), the transaction must be conducted in good faith and for the advantage of the corporation. The declaration allowing for a reduction of capital and the redemption of redeemable preference shares needs to have all directors' signatures on it. The declaration authorizing a share repurchase or the donation of funds to a company needs to be signed by the majority of the board of directors. While doing so, the Registrar makes a determination regarding the appropriate format for the solvency statement. The statement needs to be signed by each director who makes it, along with the director's name and the current date. The directors of the company are the ones who have to prove that the firm is solvent by issuing a solvency statement claiming that the company passes the solvent test. with the purpose of determining whether or not the company is financially stable so that it can buy back its own shares.

In addition, the director's viewpoint needs to be based on what the individual has learned about the company's current status and its plans for the future. Furthermore, the viewpoint needs to take into consideration all of the company's obligations, including those that aren't yet definite. If any director, even if that director didn't sign the declaration, believes that it's likely that the listed company won't be able to pay for the relevant purchase(s), that director must immediately notify the board of directors of the listed corporation in writing and file a copy of that notice with Bursa Malaysia. This is required by paragraph 12.13 (2) of the Bursa Malaysia Listing Requirements. If any director believes that it's likely that the listed company won't be able to pay for the When this notice is delivered, the prior declaration of solvency will no longer be legitimate because it will no longer have been given. As soon as it is determined that the board would suggest the share buyback, the BOD of the listed business is required to make an immediate announcement that it will send a proposal to shareholders in order to obtain authorization for the listed company to acquire its own shares.

The second role of BOD is to ensure that the consent of shareholders is obtained. The shareholders of a corporation elect the board of directors to represent them in overseeing and running the company's management and in making decisions for the company itself. As a result, it is the direct responsibility of the board to safeguard and properly administer the interests of the company's shareholders. The Board of Directors is responsible for calling a meeting of the shareholders. The proposal to buy back shares needs to be submitted to shareholders at the annual general meeting. Before the shares can be repurchased, it is necessary to first secure the necessary approval according to the provisions of section 127(1) of the CA 2016 and paragraph 12.03 of the BMLR

The Board of Directors is responsible for determining the cost and quantity of stock buybacks, which is the third task it performs. The Bursa Malaysia Listing Requirements (BMLR) outline the rules that must be followed for the following topics: Listed companies are only allowed to repurchase a certain number of their own shares before hitting a predetermined cap. The amount can't be higher than 10 percent of the total issued and paid-up capital for the company: para 12.09, BMLR. The current value of the shares, as determined by the market, will serve as the basis for determining the price at which they can be purchased. Because the price is compared to the average price of shares already trading on the market, which is taken into consideration, it is not allowed to be more than 15 percent higher than that price. This number needs to be determined out based on the five trading days immediately prior to the share buyback: para 12.17 BMLR. Where can I find out the price at which it will be resold? cannot be lower than the average price of the shares that were traded on the market in the five days leading up to the resale of the shares. The price of the shares being resold cannot be lower than the weighted average market price of the shares for the five trading days immediately preceding the resale by more than 5 percent. However, if the resale price is this discounted price, the resale can't take place until 30 days after the date of purchase, and the resale price can't be less than what it cost to buy the shares in the first place according to para. 12.18 of the BMLR.

According to Rozen (2022) the board of directors need to focus more of their attention on issues such as the repurchase of shares. In particular, directors must give careful consideration to how much money is spent on repurchases in comparison to how much value the company can reasonably contribute through internal development or foreign acquisitions. They need to exercise extreme caution when considering large repurchase plans that are to be funded by the sale of debt rather than the money that would have been generated by the company's profits. The BOD should look at all the ways cash can be used by a company.  The board of directors ought to come to an agreement to buy back sufficient shares to cover the costs of plans to provide workers stock options and restricted shares. Buybacks would have the least amount of an influence on the public shareholders of the company if they were carried out at this level. In a similar fashion, directors ought to support capital investment that is essential to maintaining the quality of the company's assets. In addition, businesses should ensure they have sufficient cash on hand to deal with unforeseen business challenges. This is of utmost significance in the event that share repurchases are funded by additional debt rather than profits. After these utmost concerns have been addressed, the board of directors will need to discuss how the funds should be distributed. Does the company have any in-house goods or research initiatives that have a good chance of yielding a return that is greater than its cost of capital? Or, if the business makes a sizable acquisition, will the subsequent increase in sales and profits be sufficient to warrant the utilization of the available funds for debt financing.

Boards of directors should also determine the amount of annual repurchases after giving careful consideration to the opportunities, both internal and external, for the company's capital as well as the objectives of the company's long-term investors. The board of directors of a corporation should, to the greatest extent feasible, support corporate initiatives that have the long-term goal of increasing the company's sales and earnings. They ought to likewise be aware of share repurchases that are paid for with debt in order to maintain the same level of earnings per share in the following quarter.

 
In conclusion those are the roles and responsibilities of the board of directors in purchase of company’s own shares and permitted share buybacks. They play a major role in the process of share buybacks.

(1)   “Unless otherwise provided in this Act, a company shall not give any financial assistance, whether directly or indirectly and whether by means of a loan, guarantee or the provision of security or otherwise, for the purpose of or in connection with a purchase or subscription made or to be made by any person of” or for –

(a)   “any shares in the company”;

(b)   “in the case where the company is a subsidiary, any shares in its holding company, or in any way purchase, deal in or lend money on its own shares.”

(2)   “Unless otherwise provided in this Act, a company shall not give financial assistance directly or indirectly for the purpose of reducing or discharging the liability”, if –

(a)   “a person has acquired shares in the company or its holding company”; and

(b)   “the liability has been incurred by any person for the purpose of the acquisition of the shares.”

(3)   “Any officer of the company who contravenes subsection (1) or (2) commits an offence and shall, on conviction, be liable to a fine not exceeding three million ringgit or to imprisonment for a term not exceeding five years or to both.”

(4)   “Where a person is convicted of an offence under this section and the Court, by which the person is convicted is satisfied that the company or another person has suffered loss or damage as a result of the contravention that constituted the offence, the Court may, in addition to imposing a penalty under subsection (3), order the convicted person to pay compensation to the company or the person, as the case may be, such amount as the Court may specify, and such order may be enforced as if it were a judgement of the Court.”

(5)   “Nothing in this section shall operate to prevent the company or any person recovering the amount of any loan made in contravention of this section or any amount for which it becomes liable either on account of any financial assistance given or under any guarantee entered into or in respect of any security provided in contravention of this section.”

 Consequences of failing to comply with this Subdivision

(1)   “If a company gives financial assistance in contravention of this Subdivision, the validity of the financial assistance and of any contract or transaction connected with the financial assistance is not affected only because of the contravention.”

 General exceptions

(1)   Section 123 shall not prohibit –

(a)   “the lending of money by the company in the ordinary course of its business if the lending of money is part of the ordinary business of a company”;

(b)   “the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of or subscription for fully-paid shares in the company or its holding company, being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company or a subsidiary of the company, including any director holding a salaried employment or office in the company or a subsidiary of the company”;

(c)   “the giving of financial assistance by a company to persons, other than directors, bona fide in the employment of the company or of a subsidiary of the company with a view to enabling those persons to purchase fully-paid shares in the company or its holding company to be held by such persons by a way of beneficial ownership”; or

(d)   “the making of a loan or the giving of a guarantee or the provision of security in connection with one or more loans made by one or more other persons by a company in the ordinary course of its business where the activities of that company are regulated by any written law relating to banking, insurance or takaful or which are subject to the supervision of the Securities Commission and where - (i) the lending of money or the giving of guarantees or the provision of security in connection with loans made by other persons, is done in the course of such activities; and (ii) the loan that is made by the company, or, where the guarantee is given or the security is provided in respect of a loan, such loan is made on ordinary commercial terms as to the rate of interest or returns, the terms of repayment of principal and payment of the interest or returns.”

 Financial assistance not exceeding ten per centum of shareholders’ funds

(1)   “This section shall not apply to a company whose shares are quoted on a stock exchange.”

(2)   “A company may, by a special resolution, give financial assistance for the purpose of the acquisition of a share in the company or its holding company or for the purpose of reducing or discharging a liability incurred for such an acquisition” if –

(a)   “the directors resolve, before the assistance is given that – (i) the company may give the assistance; (ii) the giving of the assistance is in the best interest of the company; and (iii) the terms and conditions under which the assistance is to be given are just and reasonable to the company”;

(b)   “on the same day that the directors passed the resolution, the directors who voted in favour of the resolution make a solvency statement that complies with provisions in relation to the giving of the assistance”;

(c)   “the aggregate amount of the assistance and any other financial assistance given under this section that has not been repaid does not exceed ten per centum of the aggregate amount received by the company in respect of the issue of shares and the reserves of the company, as such aggregate amount is disclosed in the most recent audited financial statements of the company”;

(d)   “the company receives fair value in connection with the giving of the assistance”; and

(e)   “the assistance is given not more than twelve months after the day on which the solvency statement is made under paragraph (b).”

(3)   “The resolution of the directors under paragraph (2)(a) shall set out in full the grounds for the conclusions of the directors made under that paragraph.”

(4)   “A reference in paragraph (2)(c) to any other financial assistance given under this section that has not been repaid includes the amount of any financial assistance given in the form of a guarantee or security for which the company remains liable at the time the financial assistance in question is given.”

(5)   “Within fourteen days from giving financial assistance under this section, the company shall send to each member of the company a copy of the solvency statement made under paragraph (2)(b) and a notice containing the following information”:

(a)   “the class and number of shares in respect of which the assistance was given”;

(b)   “the consideration paid or payable for those shares”;

(c)   “the name of the person receiving the assistance and, if a different person, the name of the beneficial owner of those share”;

(d)   “the nature, the terms and, if quantifiable, the amount of the assistance.”

(6)   “The company and every officer who contravene this section commit an offence and shall, on conviction, be liable to a fine not exceeding three million ringgit or imprisonment not exceeding five years or to both and, in the case of a continuing offence, to a further fine not exceeding one thousand ringgits for each day during which the offence continues after conviction.”

Several of the company’s articles of association mentioned the company’s shares purchases. And only two issues were examined by the court which included Article 179 and Article 181. Article 179 stated that any share might be acquired by the firm from any interested seller at such price which was not exceeding the then marketable worth thereof, as the board thinks it is reasonable. Article 181 also outlined that shares bought in this manner may be disposed of by the BOD, or they may be completely extinguished, as they see fit for the firm.  

For this case, the defendant, Whitworth was disposed of his shares to the company in 1880 under a two-part payment arrangement, which means it will be paid in two types of installments. However, he got the first installment but died before he got the second installment. The company also declared bankruptcy in 1884. The plaintiff, Trevor, became the liquidator of the bankruptcy company. The executors of Whitworth’s estate approached the plaintiff, Trevor, for the remaining funds owing from the sale of shares. The Vice Chancellor of the County Palatine of Lancaster in the first instance, said that “the claim against the firm ought not to be granted”. 

While the Court of Appeal overturned the judgment and granted the claim. Trevor, the plaintiff, appealed the Court of Appeal’s decision. The acquisition of its own shares by a limited company founded under the Companies Act is ultra vires and invalid, according to counsel for the plaintiff, Trevor, regardless of whether power is granted in the MOA. It is also not required to go that far in this case because the memorandum granted the firm no authority to acquire its own shares, and the article of association cannot extend the memorandum to objectives outside of its own scope. As a result, the section of the articles authorizing such a purchase if invalid, and the contract of purchasing was ultra vires, and no future ratification could help. On the other hand, the counsel of Whitworth, the defendant, claimed that the articles of association should be understood to allow any acquisitions that are compatible with the memorandum, and that the acquisitions in this case were or might be related to the firm’s operation, and were thus authorized by the memorandum. The defendant’s counsel also claimed that it may be necessary to purchase out aggressive shareholders or prevent competitor business candidates from becoming the shareholders of the firm.

The issue of this case is whether the company could purchase its own company shares. The decision by the House of Lords determined that the firm acted outside of its authority. The defendant’s claim for the balance was denied since it acquired its own shares even if it was allowed under its articles. The ruling was based on the principle that a limited liability company’s capital should be preserved to fulfill the demands of the creditors. Since the creditors undertake risks in their investment in any related transactions, the law prioritizes creditors above shareholders when the capital is recovered. This case has established precedent and is known as “the rule in Trevor v Whitworth’, which states that a firm is not allowed to reduce its share capital without jeopardizing the creditors’ interests and rights. The Companies Act, by implication, prevents a company from returning cash to its shareholders unless it does so in one of the ways specifically allowed by the Acts. Therefore, a company acquiring shares that is not authorized under the Companies Act is illegal and ultra vires.

For this case, Lord Watson added that every transaction between a company and its shareholders, by which the money previously has paid to the company in respect of his shares is returned to him, unless the Court has sanctioned that transaction. Lord Watson also explained that the persons who deal with or give credit to a limited company, naturally rely on the fact that the company is trading with a certain amount of the already paid capital, as well as the responsibility of its members for the capital remaining at call. They are also entitled to assume that no part of the capital that has been paid into the company has been lost. Moreover, Lord Macnaghten added that if the shareholders believed it is worthwhile to spend their money to get rid of a difficult partner who is prepared to sell, they may put their hands in their wallet and buy him out, though they cannot draw on a fund in which others as well as themselves are engaged (Dls, 2021). 

Another related case is Hope v The International Financial Society, Ltd. In this case, the facts were that the BOD was permitted at an extraordinary general meeting to purchase shares from the shareholders who were willing to dispose of their shares up to 100,000 out of 150,000, which was not allowed to be reissued without the approval of a general meeting. The directors were barred from acting on the resolution by the plaintiff, a minor shareholder and creditor of the company. The injunction granted by James, L.J., was based on the fact that either this is a purchase of shares in the sense of stock trading, which is business not permitted by the MOA, or it is an extinguishment of the shares, which resulted in a reduction in capital. It is considered as ultra vires if it is the former while if it is the latter, it is invalid since the statutory method was not followed.

Chen, J. (2022, April 18). Board of Directors (B of D). Investopedia. Retrieved May 29, 2022, from https://www.investopedia.com/terms/b/boardofdirectors.asp

Dls. (2021, July 28). Trevor v Whitworth: HL 1887. Retrieved from https://swarb.co.uk/trevor-v-whitworth-hl-1887/

Hayes, A. (2022, May 28). What is a buyback? Investopedia. Retrieved from https://www.investopedia.com/terms/b/buyback.asp

National Malaysia Berhad (n.d.). Laws of Malaysia Act 777 Companies Act 2016. Retrieved from https://www.ssm.com.my/Pages/Legal_Framework/Companies%20-Act%20-1965-(Repealed)/aktabi_20160915_companiesact2016act777_0.pdf

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"The Investopia Team". (2022, February 8). What are shares? Investopedia. Retrieved May 29, 2022, from https://www.investopedia.com/terms/s/shares.asp