Public companies are allowed to buy back their shares on the market but must ensure certain conditions.

This article was consulted by Lawyer Nguyen Quang Trung

Legal grounds:

• Securities Law 2019;
• Circular No. 120/2020/TT-BTC.

We receive the following questions:

I would like to ask if a public company wants to buy back shares, does the source of money to buy back require any conditions? Can the company use working capital to buy back? And is the company subject to any conditions on the buyback price?

Public companies are allowed to buy back their shares. However, it should be noted that you cannot arbitrarily buy back shares with any source of money.

1. What type of capital is used to buy back shares

Pursuant to Clause 1, Article 36 of the Securities Law 2019 as follows:

Article 36. Public companies repurchase their own shares

1. A public company that repurchases its own shares must meet the following conditions:
   • a) There is a decision of the General Meeting of Shareholders approving the repurchase of shares to reduce charter capital, the repurchase plan, which clearly states the quantity, implementation time, and principles for determining the repurchase price;
   • b) Have enough resources to buy back shares from the following sources: capital surplus, development investment fund, undistributed after-tax profits, other funds belonging to equity used to supplement capital charter according to the provisions of law;
   • c) There is a designated securities company to conduct transactions, except in cases where the securities company is a member of the Vietnam Stock Exchange and repurchases its own shares;
   • d) Meet the conditions prescribed by law in the case of a public company belonging to a conditional business and investment industry;
   • đ) Not falling into the cases specified in Clause 3 of this Article.

According to the above regulations, public companies can only use the following 4 types of capital to buy back their shares on the market:

• Surplus equity;
• Development investment fund;
• Undistributed after-tax profits;
• Other funds belonging to equity are used to supplement charter capital in accordance with the provisions of law.

Thus, public companies are not allowed to use working capital to buy back shares. This regulation is intended to ensure that the capital used for regular business activities of the enterprise is not affected.

2. Conditions on stock repurchase price

Public companies have the right to repurchase by order matching method or by agreement. However, the repurchase price is controlled at a ceiling level.

Pursuant to Clause 1, Article 8 of Circular No. 120/2020/TT-BTC as follows:

Article 8. Public companies trade their own stocks

1. A public company that repurchases its own shares on the stock trading system must comply with the following regulations:

1. Public companies must carry out transactions to buy back their own shares in accordance with the information disclosed in accordance with the provisions of Clause 4, Article 37 of the Securities Law.
2. Principles for determining the price to buy back one’s own shares of a public company by order matching or agreement method are prescribed as follows:
   • Order price ≤ Reference price + (Reference price x 50% Stock price fluctuation range).
   • Order volume: In each trading day, the total order volume must be at least 3% and maximum 10% of the trading volume registered with the State Securities Commission (order volume does not include cancellation orders and this regulation are waived when the remaining repurchase volume is less than 3%).

This regulation applies until the public company completes the transaction to buy back its own shares with the volume registered with the State Securities Commission.

According to the above regulations, stock repurchase transactions on each trading day of public companies are controlled as follows:

• About price: Order price ≤ Reference price + (Reference price x 50% Stock price fluctuation range).
• Regarding volume: The minimum order volume is 3% and the maximum is 10% of the registered buyback transaction volume (excluding order cancellation volume). If the volume to be repurchased is less than 3%, the entire amount can be ordered.