Share repurchase

Share repurchase (or stock buyback) is the re-acquisition by a company of its own stock. It represents a more flexible way (relative to dividends) of returning money to shareholders.

In most countries, a corporation can repurchase its own by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as , available for re-issuance.

Under US corporate law there are five primary methods of stock repurchase: open market, private negotiations, repurchase 'put' rights and two variants of self-tender repurchase: a fixed price tender offer and a Dutch auction. More than 95% of the buyback programs worldwide are through an open-market method, whereby the company announces the buyback program, and then repurchases shares in the open market (stock exchange). In the late 20th and early 21st centuries, there was a sharp rise in the volume of share repurchases in the US: US$5 billion in 1980 rose to US$349 billion in 2005. Large share repurchases started later in Europe than in the US, but are nowadays a common practice around the world.

It is relatively easy for insiders to capture insider-trading like gains through the use of "open market repurchases". Such transactions are legal and generally encouraged by regulators through safe-harbours against insider trading liability.

U.S. Securities and Exchange Commission (SEC) rule 10b-18 sets requirements for stock repurchase in the United States.

Companies typically have two uses for profits. Firstly, some part of profits can be distributed to shareholders in the form of dividends or stock repurchases. The remainder, termed retained earnings, are kept inside the company and used for investing in the future of the company, if profitable ventures for reinvestment of retained earnings can be identified. However, sometimes companies may find that some or all of their retained earnings cannot be reinvested to produce acceptable returns.

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