A forward share repurchase agreement, also known as a forward repurchase agreement or a forward stock repurchase, is a financial contract between a company and an investor that allows the company to buy back its own shares at a predetermined price and date in the future.
Forward share repurchase agreements are a popular mechanism used by companies to manage their capital structure and return excess cash to shareholders while also providing a degree of price stability in the market. These agreements are particularly popular with companies that have a lot of cash on their balance sheets but may not have any immediate investment opportunities.
Under a forward share repurchase agreement, the company agrees to buy back a certain number of its own shares at a specific price and date in the future, usually six months to two years down the line. The investor, in turn, agrees to deliver the shares to the company at the agreed-upon time and price. The price at which the shares are repurchased is typically at a premium to the market price at the time of the agreement.
Forward share repurchase agreements provide a number of benefits for both companies and investors. For companies, they offer a way to return capital to shareholders while also reducing the number of outstanding shares, which can improve earnings per share and increase the returns on equity. For investors, they offer the opportunity to lock in a higher price for their shares while also providing a guaranteed return on their investment.
One potential downside of forward share repurchase agreements is that they can be expensive for the company, especially if the stock price declines between the time the agreement is signed and the time the shares are repurchased. Additionally, these agreements may not be suitable for companies that may need the cash in the short term, as the cash is committed to the repurchase agreement and cannot be used for other purposes.
Overall, forward share repurchase agreements are a useful tool for companies looking to manage their capital structure and return excess cash to shareholders, while also providing a degree of price stability in the market. As with any financial contract, it is important for companies and investors alike to carefully consider the potential benefits and risks before entering into a forward share repurchase agreement.