Repurchase of shares free of charge

A few days ago an informal poll was made on the Twitter page of the “Instituto de Análisis Societario” -Ideas- (@iasocietario) where the question was asked:

"I own 20% of the shares that make up the subscribed capital of Acme S.A.S. I do not want to continue to belong to the company, nor sell my shares. Can I DONATE my shares of Acme S.A.S. to Acme S.A.S. itself?".  Despite the complexity of the question, 69% of respondents answered favorably, while 10% answered negatively; another 10% indicated that "it depends" and 11% answered that they "did not know".

This generalized position is consistent with the opinion that the Superintendency of Companies (the "Superintendency") has on the matter and that it has made public through its Official Notices 220-19704 of 2003 and 220-201029 of 2016.

In the recently issued Guideline on premium on issuance and repurchase of equity instruments, the Superintendency, in addition to reiterating this thesis, indicated that "The shareholder's decision is to deliver to the company free of charge and irrevocably the shares he/she owns, so the delivery is made at par value and the amount recognized in the retained earnings item should be considered as an unrealized gain."

It is positively surprising to see the conceptual clarity of the Colombian corporate lawyers who participated in this survey since, undoubtedly, this position constitutes a progressive and systematic interpretation of the rule that regulates the acquisition of treasury stock.

Article 396 of the Code of Commerce states that, to acquire its own shares, the corporation, in addition to having the approval of the corresponding corporate body, "shall use funds taken from the net profits, and it is also required that such shares be fully paid up".

Thus, the position of the Superintendence and of most of the practitioners of corporate law in Colombia leads to the understanding that funds from profits must be used only when the operation is made for valuable consideration, not when it is made free of charge as in the case of donation.

In his book "Cátedra de derecho contractual societario" (Legis, 2014 p. 715), Professor Néstor Humberto Martínez indicates that "in order that the repurchase of shares does not constitute a veiled restitution of contributions to the partners, contrary to the principle of integrity and immutability of the capital of joint stock companies, the law requires that the acquisition of shares by the same company be made with charge to 'funds taken from the liquid profits'".

It is clear then that the condition that the operation be made affecting the equity account of net profits applies only if the operation is onerous. If it is free of charge, it is sufficient that the other conditions established therein are met, i.e., that the approval of the corporate body is given, that the shares are released and that the existing statutory requirements are met, such as the preemptive right.

In tax matters, this operation will not have any effect for the repurchasing company until it has the shares. This, since in the absence of a tax provision regulating the transaction, it must be taxed according to its accounting treatment (article 21-1 of the Tax Statute) and, according to IFRS, the transaction must be recorded as an unrealized gain for the repurchaser.