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Under present Swedish legislation a company is prohibited from signing for, acquiring or taking as security shares issued by the company itself or by a parent company. This rule, originally justified by the need to protect the creditors of a company, was introduced in 1895 and has been restated in subsequent legislation for a variety of reasons.

Only in certain special cases is a company allowed to acquire its own shares, such as when the shares from part of a business acquired by the company or are acquired at a forced auction to protect the interests of the company. Acquired shares must be resold as soon as this can be done without a loss being sustained and in any event within three years. While holding shares of its own, a company may not vote for these shares and must book them at nil value.

A company may further redeem its shares when reducing its issued share capital in order to cover a loss or for repayment to shareholders, but the latter case is subject to several restrictions in order to protect company creditors.

The Second Company Directive of the European Community (77/91/EEC) leaves it to member states to decide if companies are to be allowed to acquire their own shares or not. Rules allowing companies to acquire their own shares, however, must meet certain criteria: the acquisition must be resolved or sanctioned by a shareholders' meeting and may not exceed 10% of the share capital.

Further, only fully paid up shares may be acquired and net assets of the company must correspond to the share capital and restricted reserves of the company. In certain cases described in the Directive these restrictions, or some them, do not apply.

A parliamentary committee reviewing the present legislation is expected to present a proposal in early 1997 in respect of this matter. It is expected that the committee will propose lifting or easing the present restrictions, thereby responding to growing public opinion in favour of greater flexibility for companies to repurchase their own shares as a method of reducing their share capital.

Lars Fredborg

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