Last Updated on February 21, 2025 by admin
A company can decide to sell shares to investors and shareholders to raise capital. A limited company has a variety of shares, both redeemable and non-redeemable. All companies have a type of ordinary shares that are non-redeemable. With these shares, shareholders have the full right to vote.
Other than ordinary shares, a company has redeemable shares which are redeemable. A company cannot only have redeemable shares it must also have non-redeemable ordinary shares. Redeemable shares are provided to a director or shareholder as a condition of providing funds to the company.
What are redeemable shares? In this article, we are going to explore what they are, how a company can redeem shares, and how they work.
What are Redeemable Shares?
These are shares that the issuing company can buy back at an agreed value on a specified date or at the company’s discretion. The company buys back the shares to pay the principal share capital to shareholders.
When redeeming the shares, the redeemable price is specified at the time the shares are issued and it may be either fixed price or based on market conditions and company’s earnings. Redeemable shares can be structured with or without voting rights compared to common shares.
Redeemable shares may or may not provide dividends to shareholders depending on the nature and priority of the dividends. Redeemable shares may often have fixed dividends, which can appeal to investors seeking steady income.
In the event of liquidation, redeemable shares may have a priority claim on assets over common shares but may rank below other types of preferred shares, depending on the company’s structure.
Why would a company issue redeemable shares?
Flexibility: Redeemable shares offer flexibility to companies in managing their capital structures. The shares give companies the flexibility to plan for future buybacks based on cash flow and financial needs.
Raise capital: Companies can easily raise capital while providing a defined exit strategy for shareholders to get a return on their investment.
Control of ownership: Redeemable shares help companies that do not want to restrict long-term ownership and make investments at the same time. Redeemable shares give shareholders limited time to control the company. Once the shares are bought back, the shareholders do not have any control of the company.
Manage dividends policy: Companies can issue redeemable shares with a predetermined redemption price instead of paying dividends. This can provide a form of capital return to shareholders without committing to regular dividend payments, which might strain cash flows.
Financial risk mitigation: Redeemable shares mitigate the risk of other financial risks associated with other forms of finances.
What is the process of redeeming the shares?
To redeem shares, some terms must be followed. These terms, along with the specific details regarding the rights associated with the shares, may be outlined in either share issue documents, articles of association, or shareholders’ agreements. A company can redeem its existing share in two methods according to the law. They can either redeem from a new issuance of shares or utilise the company’s current share capital.
Each approach is governed by specific regulations that dictate the circumstances under which a corporation may legally redeem redemption shares.
Before a company redeems its shares through new shares allotment, it must meet several conditions such as:
- The company’s articles must not impose any restrictions on its ability to issue shares.
- There must be a distinct class of non-redeemable shares within the company.
- Shareholders are required to have fully paid the company for the shares at the time of issuance before any redemption occurs.
- The rights associated with the redeemable shares must either be explicitly outlined in the company’s articles or there must be a provision in the articles that empowers the directors to define the rights linked to the shares.
Once redeemed, the shares are regarded as canceled rather than being transferred to a third party. Additionally, the directors are required to inform Companies House within one month from the date of redemption, accompanied by a statement of capital.
The date of redemption may be a specified future date (for instance, a set date or a defined number of years following issuance), unforeseen upon a triggering event, such as an initial public offering (IPO), and may be determined at the discretion of the board of directors. This may occur upon the resignation or termination of an individual’s employment or directorship, as well as at the discretion of the company or the shareholder.
What happens after redeeming shares?
Following the completion of a share redemption, the company is required to maintain a copy of the directors’ resolution and any shareholder resolution that authorises the redemption and document for the relevant transactions in the company’s accounting records, which should include:
- The payment made for the redemption.
- A reduction in the issued capital equivalent to the nominal value of the redeemed shares.
- A decrease in the share premium account by the lesser of the premium initially received upon the issuance of the redeemed shares or the current balance of the share premium account.
- A transfer from the profit and loss account to a capital redemption reserve of the amount paid for the redemption from distributable reserves.
For a private limited company where the redemption is financed in whole or in part from capital, it is necessary to retain copies of the following documents, as applicable:
- A directors’ statement of solvency;
- A special resolution that approves the share redemption;
- Any required auditors’ report;
- A notice published in the London Gazette; and either
- A notice published in a national newspaper
- A record of notification sent to all creditors.
If the redemption was sanctioned by the shareholders, a copy of the shareholders’ resolution must be filed with Companies House.
In all instances, form SH02 must be completed and submitted to Companies House. This can be done either through a paper copy or an electronic version submitted via their document upload process. Sections 1, 2, 5, 7, and 8 must be filled out, and section 9 should be signed on behalf of the company.
Conclusion:
In conclusion, redeemable shares are a good way for the company to finance its business while maintaining limited control ownership. This is a safe and secure way for companies to fund their business rather than taking financial loans which have hefty penalties or consequences when you default.
For more information on UK company formation or company structural change, contact us at [email protected].
FAQs
Q: What are non-redeemable shares?
Ans: These are the shares that cannot be bought back. Once an investor or shareholders buy those shares, they cannot be bought back by the issuer during the lifetime of the company.
Q: Are ordinary shares redeemable?
Ans: No, ordinary shares are not redeemable. These shares are a type of equity investment, once purchased it gives investors or shareholders ownership rights in the company. If the company goes into liquidation, shareholders can claim the repayment of their capital.
Q: Are redeemable preference shares debt or equity?
Ans: Redeemable preference shares are debts since the company can buy them back from investors or shareholders. Redeemable shares limit the ownership of investors and shareholders in the company.
Q: How to calculate redeemable preference shares?
Ans: The formula to calculate redeemable preference shares is:
(Annual Dividend times Number of Years) + (Principal Repayment)
This formula calculates the total return on redeemable preference shares by adding the dividends received over the holding period to the principal repaid at redemption.
Read Also:
- Understanding Your Rights: What to Do If Your Employer Doesn’t Issue a P45
- Preference Shareholders vs. Ordinary Shareholders: What’s the difference?
- Can HMRC Access Your Bank Account? What Every Taxpayer Should Know
- Share Capital: Key Advantages and Disadvantages Every Business Owner Should Know
- How to Change Your SIC Code on Companies House: A Step-by-Step Guide for UK Businesses
- Lost Your Government Gateway User ID and Password? Here’s How to Find Them
- A Step-by-Step Guide to Resign as a Director of a Limited Company
- How to Fill Out a Stock Transfer Form J30: A Step-by-Step Guide