Taxes, tenders and the design of Australian off-market share repurchases


  • We are grateful for comments on earlier versions to Bruce Grundy, Vernon Joice, Peter Monkhouse and to participants in the seminar series at Manchester Business School, the 2010 Latrobe Corporate Finance and Governance Conference and the 2010 FMA International Conference, and to an anonymous referee. Any remaining errors are our responsibility.


In designing off-market (self-tender offer) share repurchases, Australian companies must consider the resulting potential tax benefits for different investor groups with consequent effects upon the supply of stock tendered by holders and the ultimate tender outcome. We develop and estimate a model of the stock supply curve that demonstrates less than perfect elasticity and incomplete tax arbitrage arising from ‘participation risk’ for potential arbitrageurs. We are able to estimate the extent of disequilibrium in prices involved in fixed-price repurchases and show that it is substantial. We show that Australian Tax Office restrictions on the tender price range for Dutch auctions have meant that non-participating shareholders have foregone some potential benefits through the transfer of tax benefits to (primarily institutional, low tax rate) successful tender participants. The results provide support for legislative changes proposed in 2009 (but not implemented as of mid 2011), which removed constraints on the allowable range of repurchase prices.