REPORTING ON THE REASONS FOR THE ACQUISITION OF OWN SHARES Review Article Economics of Agriculture 3/2014 UDC: 347.728.2 REPORTING ON THE REASONS FOR THE ACQUISITION OF OWN SHARES1 Vladan Pavlović2, Janko Cvijanović3, Srećko Milačić4 Summary Mere knowledge that the company has acquired own shares is not always of great importance. Information on the acquisition of own shares from dissenting shareholders or the squeeze-out of minority shareholders is not of great importance to the users of financial statements. In the first case, it is far more significant to disclose the significant event that allowed dissenting shareholders to resign from the company. However, the purchase of own shares due to certain reasons, such as the purchase of own shares at a premium in order to influence the market value of shares, the repurchase focused on preventing greater harm to the company, which is especially true at a time of financial crisis, or the repurchase of own shares as a means of disbursing shareholders, is of great importance to the users of financial statements. Therefore, modern legislation in developed countries obliges companies to disclose a range of information regarding own shares, including the reasons for the acquisition. The above is also proscribed by the relevant EU directives and national legislation. The paper points out that the legal norms governing the obligation of reporting on own shares in Serbia are not harmonized and that most public companies in Serbia, despite the legal obligation, do not disclose the reasons for the acquisition of own shares. Key words: own shares, reporting, management report, notes to financial statements JEL: M41, G32, K22 1 This paper is a part of the results of the research on Project 179001 supported by the Ministry of Education and Science of the Republic of Serbia. 2 Vladan Pavlović, Ph.D., Full Professor, University of Priština, Faculty of Economics (Kosovska Mitrovica), Kolašinska Street no. 156, Kosovska Mitrovica, Phone: +381 28 497 934, E-mail: [email protected] 3 Janko Cvijanović, Ph.D., Principal Research Fellow, Economics Institute, Belgrade, Kralja Milana Street no. 16, 11000 Belgrade, Phone: +381 11 361 31 17, E-mail: [email protected] 4 Srećko Milačić, Ph.D., Full Professor, University of Priština, Faculty of Economics (Kosovska Mitrovica), Kolašinska Street no. 156, Kosovska Mitrovica, Phone: +381 28 497 934, E-mail: [email protected] EP 2014 (61) 3 (707-721) 707 Vladan Pavlović, Janko Cvijanović, Srećko Milačić Introduction The growing importance of capital markets and the liberalization of regulations has contributed to intensive purchase of own shares. Own shares can be acquired in order to reduce the shareholders’ capital, which refers to a special acquisition of shares, or for any other reason, which refers to a general acquisition of shares, where the shares must be disposed of or cancelled within the statutory deadline (International Finance Corporation, 2008). In the United States of America today, the acquisition of own shares stands for the most commonly discussed topic in the field of finance during boardroom meetings (Henry, 2004). The above-stated belief is not surprising when one takes into account the fact that according to some estimates, over the course of years more shares have been purchased than issued (Todorović, 2008). Expansion of the purchase of own shares appeared in the United States of America after 1980s, primarily as a mechanism of shareholder disbursement, which led to the fact that the programs of the purchase of own shares started being viewed as a means of payment of excess cash to investors. Dominance of the purchase of own shares in the USA as an alternative to dividend payment has resulted in the fact that literature covering this field has expanded the term “dividend policy”, so that this term no longer implies a profit distribution policy, but also the money disbursed to shareholders through the purchase of own shares (Pavlović, 2010). Therefore, American literature always places the purchase of own shares with the intention of disbursing shareholders in the first place when stating the reasons for the acquisition of own shares (Pavlović, 2010). However, there are many other reasons that guide companies towards the acquisition of own shares. If it is legally possible, there can be several methods for the acquisition of own shares available to companies. The most commonly used methods are: the fixed price tender offer, the Dutch auction, the open market repurchase and the purchase of shares on the basis of direct negotiations with shareholders who own significant percentage of equity. Preference for the purchase method stems from the aim underlying the purchase and a specific situation that the company is facing. Reasons for the acquisition of own shares If there are no legal restrictions, companies purchase own shares for the following reasons:(1) disbursement to shareholders; (2) stimulating employees, primarily management of the company without increasing the total number of shares (stock options); (3) an increase in the stock exchange share price; (4) the acquisition of equity in other companies where the purchased shares are used as a means of payment or coverage for issued convertible securities, or bonds that can be converted into equity (convertible bonds), or as a coverage for the warrants issued; (5) the realization of the capital gain upon subsequent sales; (6) prevention of a hostile takeover; (7) the force of law; (8) supporting share liquidity maintenance agreement (Pavlović, 2010). When the issue of the acquisition of own shares in Serbia is taken into account, the current Companies Law (“Official Gazette of RS”, No. 36/3011 and 99/2011) is the most liberal law so far. The legislator adopted a mixed system of the acquisition of owns shares (public 708 EP 2014 (61) 3 (707-721) REPORTING ON THE REASONS FOR THE ACQUISITION OF OWN SHARES or non-public). Specifically, the law enables joint stock companies to acquire own shares: (1) directly on the basis of the decision reached by the General Assembly of the company, where no specific reasons for the acquisition of own shares are stated; on the basis of this, the law joined the modern trend not to prescribe the basis for the acquisition of own shares (legal restrictions are listed), and, exceptionally, (2) based on the decision made by the board of directors or supervisory board if the management of the company is bicameral, but only if the acquisition of shares is based on one of the reasons explicitly stipulated by the Article 282 of the law. Therefore, the acquisition of own shares is allowed (1) if it is necessary to prevent greater and immediate harm to the company; (2) if the shares acquired are to be distributed to the company’s employees or affiliates, or as a reward to the members of the board of directors or executive and supervisory board if the management of the company is bicameral, under specific prescribed conditions that must be met. Therefore, the decision to acquire own shares should be made by owners in their own interest, which is close to reality if the decision is made directly at the shareholders’ meeting. However, if the owners make a decision indirectly, through the representative acting on their behalf, at the meeting of the supervisory board (or otherwise)the owners’ interest can be blurred or suppressed by distortions which are, in fact, different forms of agency problems resulting from the separation of ownership and management (Cvijanović et al., 2010). Companies can acquire own shares without any special conditions defined by the Article 282 in the following cases: (1) the institution of protecting the rights of dissenting shareholders, in the following cases (Article 474): (a) by the change in the company’s statutes that reduces shareholders’ rights defined by the statute or the law; (b) by the change of the status;(c) by the change of the legal form;(d) by making a decision on the change in the duration of the company; (e)by making the decision on the approval of the acquisition or disposal of major assets;(f) the adoption of certain decisions that alter certain rights defined by the company’s statute;(g) the decision on the withdrawal of one or more classes of shares from the regulated market or multilateral trading platform; (2) as a result of the exclusion of shareholders; (3) during unencumbered acquisition of own shares; (4) as a result of changes in status; (5) on the basis of a court decision; (6) if the shares are acquired for the purpose of conducting the procedure of capital reduction; and (7) squeeze-out of minority shareholders (Article 515). The above-stated solutions represent a significant improvement in relation to the solutions provided by the previous law. In fact, previous Companies law (“Official Gazette of RS”No.125/2004) also stipulated that companies can acquire own shares directly on the basis of the decision of the company’s assembly, without stating special reasons for the acquisition of own shares, and exceptionally, based on the decision of the management board, with the purpose of distributing them to the employees of the company or affiliates and to prevent major and immediate harm to the company (Article 222).However, proscribing that the company can acquire own shares only with the method pro-rata, the legislator, in fact, prevented the acquisition of own shares aimed at preventing harm to the company (Pavlović, 2010). By proscribing the method pro-rata as the binding method, the legislator improperly EP 2014 (61) 3 (707-721) 709 Vladan Pavlović, Janko Cvijanović, Srećko Milačić operationalized the principle of equality of shareholders in the acquisition of own shares. Specifically, the above-stated principle is in contemporary legislations understood as equality of opportunities, and not of results (Parać, 2009).