Why do companies buy-back their previously issued common shares?

In addition to issuing new common shares from the company’s treasury, it may also remove shares that were previously issued. The company’s Board of Directors would need to approve the use of company resources to repurchase outstanding shares. This type of purchase is often referred to as a Share Buy-Back Program.

In an effort to enhance the value of common shares, a company may decide to use surplus cash to repurchase previously issued shares directly from investors.  In many cases, a company may decide to borrow from investors, by issuing bonds, and then use the debt proceeds to repurchase their issued shares. In theory, this would concentrate ownership in the hands of fewer common shareholders, thereby increasing the value of each outstanding share.

In a few instances, a company may elect to conduct a reverse Share-Split or Share Consolidation. This occurs when the company decides that too many shares have been issued and that shareholders and the business would do better with fewer shares issued and outstanding. For example, the company may decide to consolidate its shares by issuing one new share for every five old shares outstanding. As a result, an investor holding 100 old shares would end up owning 20 new shares.

In extreme circumstances where a company files for bankruptcy, the old common shares may have no value because the company’s creditors are owed more than the company’s assets are worth and the old shares are then cancelled. New shares may then be issued to the company’s creditors as a result of the post-bankruptcy business plan.

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