Redeemable shares

Redeemable shares can be either:

• preference shares or
• issued as ordinary shares

but when they issued they buy back the shares at some future date or carry a right by the company to redeem. Because of buying back shares the capital of a company is reduced. There are strict rules connected with the issue of such shares. When the company is a public limited company so it is needed to have in its articles prior to authorization to issue redeemable shares. This provides the public whose acquisition shares to know whether a company might issue redeemable shares. The private limited company does not need to sign an authorization to issue redeemable shares in its articles, however, the company should prohibit or restrict the issuing of redeemable shares through a provision in its articles Redeemable shares might just be issued if the company either has other shares which cannot be redeemed. Therefore, the company limited by shares might never end up with no shareholders leaving just a Board of Directors, who are not shareholders only running the company. Redeemable shares might be issued as redeemable among certain dates or at a time to be determined by the Board of Directors or with a fixed date for redemption. Redeemable shares are useful during the needs of a company to raise short-term capital to expand its business and during flourishing the business is buys back the shares. Investors might be attracted by redeemable shares because they might know when the company will purchase them back and frequently dividends payable on them is rationally high.

The issues of redeemable shares

A company limited by guarantee or by shares with a share capital might if authorized by its articles, issue redeemable shares. They might be issued like redeemable at the option of the shareholder or the company. Redeemable shares might be issued merely if there are other shares in issue which cannot be redeemed. Therefore, there is not possible for a company to repurchase all its share capital and finish up under a board of directors with any members.

The redemption of redeemable shares

Redeemable shares might be not repurchased unless they are fully paid. The capital issued of a company is the creditors' buffer so it is this form, and not the paid-up capital, which has to be replaced. The terms of the repurchase must supply that the company should pay for the shares on repurchase and not, for example, as by creating a creditor at a later date. Creditors do not receive interest on outstanding debt, without special contractual provision, so that failure to pay on repurchase would give the company the resourcefulness of the share capital without cost.

Examples of Redeemable shares

• Preference shares: Preference shares are a type of redeemable share that gives holders priority when it comes to dividends and repayment of capital. Preference shareholders usually receive a fixed dividend each year, regardless of the company's financial performance. For example, a company may issue preference shares with a 7% dividend, payable twice a year.
• Convertible bonds: Convertible bonds are another type of redeemable share. They allow holders to convert the bond into a specified number of common shares at a predetermined price. For example, a company may issue a convertible bond with a conversion price of $50 per share.
• Warrants: Warrants are another type of redeemable share. They give holders the right, but not the obligation, to purchase a specified number of common shares at a predetermined price. For example, a company may issue warrants with a strike price of $60 per share.
• Exchangeable shares: Exchangeable shares are a type of redeemable share that gives holders the right, but not the obligation, to exchange their shares for shares of another company. For example, a company may issue exchangeable shares that can be exchanged for shares of an affiliated company.

Advantages of Redeemable shares

Redeemable shares are a type of equity security issued by a company that can be purchased and later redeemed for a predetermined price. These shares provide shareholders with the potential to benefit from appreciation in the share price or from dividends paid out to shareholders. The following are the advantages of redeemable shares:

• Redeemable shares are a flexible source of capital for companies, allowing them to access funds when necessary.
• Companies can issue redeemable shares at a lower cost than borrowing money.
• Shareholders are able to benefit from appreciation in the share price, as well as from dividends paid out to shareholders.
• Redeemable shares can also be used to attract and retain key employees, as they may be offered redeemable shares at a discount.
• For companies that issue redeemable shares, they can be used to raise capital to expand the business or reinvest in other business activities.
• Companies can also use redeemable shares to reduce their tax liabilities, as dividends paid on these shares can be paid without incurring corporate taxes.

Limitations of Redeemable shares

Redeemable shares are a type of share that can be repurchased by the issuing corporation at a predetermined price. However, there are several limitations associated with redeemable shares. These include:

• The number of redeemable shares is limited by the company’s articles of incorporation and the amount of money that can be used to repurchase them.
• Redeemable shares are not eligible for dividend payments from the company.
• Redeemable shares can only be repurchased on certain specified dates, and the repurchase price is often fixed.
• The issuing corporation is not obligated to redeem its shares, so there is no guarantee that shareholders will be able to retrieve their money.
• Redeemable shares may be subject to certain restrictions regarding their sale or transfer.
• Redeemable shares often have a limited lifespan, meaning that they will eventually expire and become worthless.

Other approaches related to Redeemable shares

Redeemable shares are a type of stock that can be bought back by the issuing company at any time, as stipulated in the company’s charter. Other approaches related to redeemable shares include:

• Preemptive Rights: Preemptive rights give current shareholders the ability to maintain their percentage of ownership in the company by buying additional shares before they are offered to the public.
• Convertible Shares: Convertible shares are a type of security that can be converted into a predetermined amount of common stock, allowing the holder to benefit from the appreciation in the value of the underlying shares.
• Warrants: Warrants are a type of security that gives the holder the right to purchase a predetermined amount of stock at a predetermined price in the future.
• Options: Options are a type of derivative contract that gives the holder the right, but not the obligation, to buy or sell a predetermined amount of stock at a predetermined price in the future.

In summary, redeemable shares are just one of several approaches to managing the ownership structure of a company. Other approaches, such as preemptive rights, convertible shares, warrants, and options, are also used to give current shareholders certain advantages and to provide the company with an additional source of capital.

Footnotes

Redeemable shares — recommended articles

External sources of finance — Hybrid instrument — Mezzanine capital — Authorized Stock — Allotment letter — Equity instrument — Dividend Recapitalization — Cumulative Preferred Stock — Charter capital

References

• Boume N. (2016)., Bourne on Company Law, Routledge
• Jones L. (2015).,Introduction to Business Law, Oxford University Press
• Keenan D.J., Smith K. (2006)., Smith and Keenan's Law for Business, Pearson Education
• Keenan D.J., Riches S. (2005)., Business Law, Pearson Education

Author: Agnieszka Piwowarczyk