Last Updated October 12, 2023
Alternate Names:
A Share Repurchase Agreement is also known as a:
- Stock Repurchase Agreement
- Stock Buyback Agreement
- Company Share Buyback
- Repurchase Agreement
What is a Share Repurchase Agreement?
A Share Repurchase Agreement is contract between a corporation and one or more of its shareholders where the corporation can buy back some of its own common stock. The document identifies the parties involved and records the total price of the shareholding, the method of payment, and the date of the transaction. The contract also includes representations and warranties on behalf of both parties to the general effect that they are each legally capable of following through with the transaction.
In other words, the corporation sells their marketable securities, like stocks or bonds, to a shareholder. As part of the deal, the corporation agrees to buy back the marketable securities at a later date.
How does share repurchase work?
Corporations in the United States can choose from five primary methods to repurchase stocks or shares, including:
- Open market: In an open market, also known as the stock exchange, the company simply announces the buyback program and then proceeds to repurchase shares.
- Private negotiations: In private negotiations, the share repurchase is negotiated between the company and an individual shareholder.
- Repurchase 'put' rights: Repurchase 'put' rights are a stock option granted by a corporation to its shareholders that allows those shareholders to sell their shares back to the corporation at a fixed price within a fixed time period.
- Self-tender offer: A self-tender repurchase is a company's offer to buy back their shares at a price that is higher than the current market value.
- Dutch auction repurchase: A Dutch auction repurchase allows the corporation to specify a price range in which their shares will ultimately be purchased. Shareholders may tender their shares at any price within the range.
Why would a company buy back its own stocks?
A corporation or business buys back its shares from the marketplace because the management of the company believes that the shares currently on the market are undervalued. By repurchasing some of the shares, the company can increase the value of any remaining shares.
A Share repurchase can be used as an alternative, or in addition to, issue of dividends as a means of delivering company profits to the shareholders. Following a share repurchase, as there are now fewer remaining shares, those shares will experience increased earnings per share.