A share buyback is when a company repurchases its own shares and cancels them. In a private Australian company it has to pass a solvency test and, above a threshold, a shareholder resolution and an ASIC lodgement, before the board can proceed.
The listed-market meaning, and the private-company meaning
A retail investor searching “share buyback” is usually reading about a listed company returning capital to shareholders and boosting earnings per share. That is a real thing, but it is not the context most relevant on a founder-stage cap table. There the buyback question is almost always narrower: what happens to a leaver’s vested ESOP shares, or an early holder’s stake, when they exit the company.
How it actually runs
Under the Corporations Act, a company must not buy back its own shares if there are reasonable grounds to suspect it is, or would become, insolvent as a result, and directors carry personal liability for authorising one while insolvent. A buyback within what ASIC calls the “10/12 limit,” no more than 10% of voting shares in any 12-month period, does not need shareholder approval. Above that limit the company needs an ordinary resolution and must lodge a notice with ASIC at least 14 days before entering the buyback agreement. ASIC treats an employee share scheme buyback, settling shares held by current or former employees under a plan like an ESOP, as its own category with a simplified process.[1]
A buyback price for ESOP shares usually ties back to how the original grant was valued under the ESS rules.
Why it matters to how an ESOP is written
A well-drafted ESOP sets out the buyback mechanics for a leaver up front, including whether unvested shares are forfeited, how vested shares are valued, and whether the company has the right (or the obligation) to buy them back rather than leaving a former employee holding shares in a private company indefinitely. Get this into the plan document before the first grant is made, not when the first person resigns.
Common questions
What is a share buyback in a private company?
The company repurchasing shares from an existing holder and cancelling them, which raises the percentage everyone else owns without them buying anything. On startup cap tables it most often settles a departing employee's vested ESOP stake.
What tests does a private company buyback have to pass?
Under the Corporations Act, the company must remain solvent and the buyback must not materially prejudice its ability to pay creditors. Buybacks over 10% of votes in a 12-month period need a special resolution and an ASIC lodgement before proceeding.
Does an ESOP need to cover buybacks?
Yes, a well-drafted plan sets out what happens to a leaver's shares up front: whether unvested shares are forfeited, how vested shares are valued, and whether the company can or must buy them back. Deciding this after someone resigns is the wrong time.
References
- General process description; the exact tests and lodgement requirements depend on the buyback type and should be confirmed with the company's lawyer or accountant before proceeding.
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