Redeemable shares are shares that a company can buy back from its shareholders at a pre-agreed price in the future—either on a specified date, upon a specific event, or at the discretion of the directors. Sitting alongside a company’s ordinary shares, this class of share may be redeemed at the option of the shareholder or company, subject to the articles of association.
This post explains the basics of redeemable shares, including the most common reasons for issuing them, the terms of redemption, and the restrictions you may need to consider.
Issuing redeemable shares in a limited company
Limited companies with multiple shareholders often issue different types of shares. This allows the company to tailor the voting, dividend, and capital rights of its members based on their contributions or different positions in the business.
All companies limited by shares will issue ordinary shares. This share class is non-redeemable and confers equal rights per share, including full voting rights. However, in certain situations, a company might want to issue redeemable shares to certain people.
Redeemable shares are those that a company agrees (or has the option) to buy back from a shareholder at some point in the future. This type of share usually (but not always) provides some kind of preferential right over ordinary shares, such as dividend rights or capital rights. They can also be issued with or without voting rights.
However, companies can only issue redeemable shares at a time when they have at least one non-redeemable share class in issue (e.g. ordinary shares).
Why would a company issue redeemable shares?
The unique feature of redeemable shares provides flexibility to both companies and shareholders, making them a popular choice in the following circumstances:
- Temporarily reshaping the capital structure of the company as and when required
- Raising capital while providing a defined exit strategy for shareholders to receive a return on their investment
- Motivating, rewarding, and retaining employees and directors by issuing shares as part of an employee share scheme
- Setting a pre-determined redemption price at the time of share issuance
- Issuing shares without diluting the decision-making powers of existing shareholders (provided that the redeemable shares are non-voting)
- Retaining greater control of the business and shareholder relations over the long term
- Returning excess capital to shareholders without the need to declare dividends (provided that the redeemable shares carry capital rights rather than dividend rights)
However, neither the company nor the shareholder has any obligation to redeem unless doing so is a requirement under the terms of redemption. The shareholder also has the right to sell or transfer their redeemable shares, subject to any restrictions in the company’s articles of association or a shareholders’ agreement.
Terms of redemption
The redemption may be at the option of the company or shareholder, depending on the pre-agreed redemption terms. These terms, along with the prescribed particulars of rights attached to the shares, may be set out in any of the following:
- share issue documents
- articles of association
- shareholders’ agreement
The terms of redemption will include the redemption date(s) and the pricing conditions of the buyback, as agreed at the time of issue. The date of redemption may be:
- a pre-determined date in the future (e.g. a fixed date or a certain number of years after issue)
- based on a trigger event, like an IPO
- at the discretion of the directors
- upon resignation or termination of employment or directorship
- at the option of the company
- at the option of the shareholder
The redemption price is normally a pre-agreed amount or calculated in a fixed way at the time of redemption. This may be the same as the share’s nominal value, the issue price, or any other amount.
Rules and restrictions on redeemable shares
The statutory provisions relating to the issue and redemption of redeemable shares are set out in Part 18, Chapter 3 of the Companies Act 2006. The following conditions apply:
- The company’s articles of association do not prohibit its ability to issue redeemable shares.
- If the company is a public limited company, it may only issue redeemable shares if its articles authorise it to do so.
- The company has at least one separate class of non-redeemable shares in issue.
- The directors may determine the terms of redemption if they are authorised to do so by the articles or a resolution of the company.
- Where the directors have the authority to determine the terms of redemption, they must do so before allotting the shares.
- Where the directors are not authorised, the articles must state the terms of redemption.
- Redeemable shares may not be redeemed unless they are fully paid (i.e. they cannot be partly paid or unpaid).
Limited companies may finance the redemption of shares in the following ways:
- out of distributable profits of the company
- using the proceeds of a fresh issue of shares made for the purposes of the redemption
However, a private company may also finance the redemption of shares from existing share capital.
Upon their redemption, the company must treat the shares as cancelled and not transfer them to anyone else. The amount of the company’s issued share capital diminishes accordingly by the nominal value of those shares
Notifying Companies House
Within one month of redemption, the directors must notify Companies House on form SH02, specifying the shares redeemed. The notice must be accompanied by an up-to-date statement of capital.
If the redemption was approved by the company’s members rather than the directors, a copy of the shareholders’ special resolution should also be included with the form.
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We recommend seeking professional advice from an accountant before issuing redeemable shares in your company. Doing so will ensure compliance and help you choose the best share structure for your business and investors.
Please leave a comment below if you have any questions about this post. For more limited company guidance, explore the Rapid Formations Blog.
