Sooner or later most startups need to take shares back: a co-founder leaves and the reverse vesting clause bites, an employee exits with vested ESS shares, an early investor wants out and nobody wants a stranger on the register. The instinctive answer — “the company will just buy them back” — runs straight into one of the oldest rules in company law. Section 259A of the Corporations Act 2001 (Cth) prohibits a company from acquiring its own shares except through a handful of gateways, and the one that matters here is the buy-back procedure in Part 2J.1 Division 2. For a startup repurchasing from particular shareholders, that almost always means the most heavily regulated bucket of all: the selective buy-back, with shareholder approval under section 257D.
Five Buckets, and Why Startups Land in the Worst One
Section 257B sorts every buy-back into one of five types, each with its own procedure: minimum holding and on-market (listed companies only), equal access (the same offer, pro rata, to every ordinary shareholder), employee share scheme, and selective — the residual category for anything that doesn’t fit the others. Buying back one departing founder’s shares, one employee’s shares, or one investor’s stake is, by definition, not an offer made to everyone on equal terms. It’s selective.
The classification matters because the procedural burden scales with the risk of favouritism. Equal access and employee share scheme buy-backs within the 10/12 limit — buying back no more than 10% of the smallest number of votes attaching to voting shares during the previous 12 months — need no shareholder approval at all, just ASIC notice; over that limit, an ordinary resolution. A selective buy-back gets no such concession: shareholder approval under section 257D is required no matter how small the parcel. There is no de minimis exception for buying back a 0.5% stake at a nominal price.
The employee share scheme bucket is worth remembering before you default to selective. If the shares being repurchased were held under an employee share scheme by (or for) employees or salaried directors, the buy-back can proceed under the ESS procedure — an ordinary resolution only if the 10/12 limit is exceeded — which is dramatically lighter than section 257D. For routine repurchases of leaver shares issued under a plan eligible for the startup ESS concession, that’s usually the right lane. Founder shares and investor shares don’t qualify, and land back in selective.
The Section 257D Vote: The Seller Can’t Vote in Favour
The core of the selective procedure is a general meeting approval with a built-in conflict rule. Under section 257D, the terms of the buy-back agreement must be approved by either:
- a special resolution (75% of votes cast), with no votes cast in favour by any person whose shares are proposed to be bought back, or by their associates; or
- a resolution agreed to at a general meeting by all ordinary shareholders — the unanimous route, which is how tightly held companies usually do it when relations are still civil.
The notice of meeting must be accompanied by a statement setting out all information known to the company that is material to the decision on how to vote — the price, how it was arrived at, the effect on remaining shareholders, and anything else a voter would want to know. ASIC has an exemption power, but exercises it rarely; plan on the statute as written.
Run the voting exclusion against a real cap table and its limits become obvious. The exclusion is narrower than founders assume: the seller isn’t disenfranchised, they just can’t vote for the resolution. Their shares can still be voted against, and against-votes count — so a departing founder holding 30% who turns hostile can defeat a 75% special resolution single-handedly. That’s why the contractual lock-in matters as much as the statute: well-drafted leaver provisions oblige the departing shareholder not to vote against the approval resolution (a promise to vote in favour is worthless, since their in-favour votes would invalidate the approval anyway). The exclusion is also asymmetric: it restrains the seller, and does nothing about non-selling shareholders who benefit. The Takeovers Panel’s declaration of unacceptable circumstances in Montu Group Pty Ltd (2024) — its first ever concerning a proprietary company that had raised under the CSF regime — involved a proposed selective buy-back of crowdfunded shareholders that would have lifted an 83.7% holder towards compulsory-acquisition territory, put to a meeting whose outcome that holder alone controlled; the Panel intervened before any vote was taken, and accepted undertakings including fuller disclosure, a fresh independent valuation and a 12-month moratorium on compulsory acquisition. The wider lesson: an unlisted company with more than 50 members can be subject to the takeover rules in Chapter 6 (CSF proprietary companies are exempt only while they stay under the CSF eligibility thresholds — Montu had outgrown them), and while an acquisition resulting from a lawful buy-back is excepted from the 20% prohibition (section 611 item 19), its control effect remains squarely within the Panel’s unacceptable-circumstances jurisdiction — which is exactly how Montu was decided. Section 257D approval is necessary; it is not always sufficient.
The 14-Day ASIC Clock That Sets the Timetable
Selective buy-backs also come with mandatory ASIC lodgements and a waiting period. Before the notice of meeting goes to shareholders, the company must lodge with ASIC the notice and every document that will accompany it (section 257D(3)), along with the terms of the offer and anything accompanying it (section 257E), under cover of Form 280. The lodgement must be made at least 14 days before the “relevant date” — the passing of the approval resolution if the buy-back agreement is conditional on it, otherwise the entry into the agreement (section 257F); a company that wants to move inside that window must instead have lodged a Form 281 notice of intention 14 days ahead. After completion the shares are cancelled on registration of the transfer — Australia has no treasury shares, so bought-back equity ceases to exist — and the cancellation must be notified to ASIC within one month (section 254Y, via the Form 484 share-structure update).
The practical consequence: a selective buy-back cannot be approved and completed the week a founder resigns. A buy-back agreement conditional on shareholder approval can — and usually should — be signed early, locking the leaver in; but the resolution and completion must wait out the ASIC lodgement, the 14-day clock, and the notice period for the general meeting, so four to six weeks is a realistic minimum. If a founder departure or funding round is being negotiated around the repurchase, the sequence has to be built into the timetable — with the leaver contractually committed at the start (a well-drafted reverse-vesting clause obliges the leaver to sell and, ideally, appoints an attorney to execute), so the statutory process is machinery rather than a renegotiation window.
Two solvency rules sit over the top. Section 257A permits a buy-back only if it does not materially prejudice the company’s ability to pay its creditors. And entering into the buy-back agreement is expressly treated as incurring a debt for the purposes of section 588G — so directors of a company anywhere near the solvency line are personally exposed, and a liquidator can pursue recovery if the company fails. The board should minute a genuine solvency analysis before signing, exactly as it would for a dividend.
The Tax Trap: Part of the Price Is a Dividend
Here’s the piece founders most often discover late. For tax purposes a private company selective buy-back is an off-market buy-back under Division 16K of the Income Tax Assessment Act 1936, and the purchase price is split: the amount debited to the share capital account is capital proceeds for CGT purposes, and the excess is a deemed dividend. (The 2023 reforms that abolished the dividend component applied to listed public companies — unlisted companies still get the split.) A seller whose shares cost them almost nothing, being bought out at a real valuation, can find most of the price taxed as a dividend — unfranked if, like most startups, the company has never paid tax and has no franking credits — rather than as a capital gain with a potential CGT discount. The Commissioner also has integrity powers where the split is engineered.
Compare the alternative: on a straight share transfer to the continuing founders, an incoming investor or an external buyer, the whole price is capital proceeds. That tax asymmetry is a large part of why departing-shareholder deals are often structured as secondary sales rather than buy-backs, with the company’s involvement limited to waiving pre-emptive rights. The buy-back earns its keep where there’s no buyer, where the price is nominal (a bad-leaver clawback debited entirely to share capital raises little or no deemed dividend), or where the commercial point is precisely that everyone else’s percentage should rise equally — which a buy-back achieves and a transfer to one buyer doesn’t.
The Bottom Line
A selective buy-back is the standard tool for taking equity back from a departing founder or investor, but it is a regulated capital reduction in all but name: section 257D approval with the seller barred from voting in favour, full material disclosure to shareholders, ASIC lodgement and a 14-day wait, solvency at signing, cancellation of the shares, and a Division 16K tax split that can turn sale proceeds into an unfranked dividend. Before defaulting to it, check the lighter paths — the employee share scheme bucket for ESS leaver shares, a secondary transfer where a buyer exists — and check the darker corners: insolvent trading exposure, oppression risk where a buy-back favours insiders, and control effects the Takeovers Panel can police once the register passes 50 members. The procedure rewards companies that plan it into the timetable, and punishes those who discover it the week a founder resigns.
This article is general information only, not legal or tax advice — the right way to repurchase shares depends on your cap table, your documents and the seller’s tax position. Viridian Lawyers advises Australian founders, startups and investors on buy-backs, capital reductions and founder departures. If a buy-back is on your board agenda, get in touch before anything is signed.
