A normal-course issuer bid is a type of buyback strategy used by publicly traded businesses. In this strategy, businesses approach shareholders to buy their outstanding shares, which are then canceled. To help get the shares, businesses may be willing to pay more than the share’s actual worth when pursuing this type of bid. By purchasing outstanding shares and limiting the total circulated number, the value of the remaining shares tends to rise. There are laws that govern how many shares a business can buy from shareholders, normally dependent on how large the company is and the number of shares outstanding.
When a business uses the normal-course issuer bid strategy, it seeks out shareholders and offers to purchase shares. While some shareholders will be reluctant, because they are long-term investors or want to experience the higher prices from the issuer bid, others will sell their shares for immediate money. Many times the business does this anonymously, so shareholders do not know the issuer is purchasing their shares. Once the shares are purchased, they are canceled and removed from the market.
The issuer sometimes may find it difficult to buy shares, because there are many long-term investors. While it may not alleviate every instance of this, the issuer commonly will offer to buy the shares for more than they are currently worth. The business does not want to lose money during a normal-course issuer bid, though, so this technique normally will be used as a standby if the business cannot obtain enough shares at normal prices.
After the shares are purchased, they are immediately canceled, which can help both the business and the shareholders. When too many shares are circulated, this causes the overall value of each share to drop. If the shares drop too much, then they may become almost worthless, meaning fewer people will be interested in buying new shares. The normal-course issuer bid decreases the total number of circulated shares, so the per-share value tends to increase.
The ability to modify share prices can give a business an unfair advantage if abused, so there are laws governing normal-course issuer bid activities. According to these laws, a business can only buy back so many shares, and this number is determined by several factors. Common factors include the business’s size, and the number of currently circulated shares. These laws normally determine how many shares the business can buy within a quarter or a year, but each country and region has different laws concerning this practice.