Redeemable shares – a complete guide

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Limited companies in the UK are allowed to issue a variety of different shares in their company. Each share represents a tiny slice of ownership in that company – but different share classes also include different rules and rights, which means not all shares are created equal.

One of the most dynamic share types a UK company can issue is a redeemable share. Redeemable shares are typically preference shares that give shareholders priority when it comes to dividends, in addition to their ability to be bought back (i.e., “redeemed”) at a certain point. This can be a great way to convince investors to take a bet on your company while providing a means for the shares to be bought back in the future.

But there is a range of rules and considerations you’ve got to bear in mind before issuing redeemable shares.

This guide explains what redeemable shares are, when and how they can be redeemed, the requirements for redeeming shares, and popular alternatives to redeemable shares.

What are redeemable shares?

Redeemable shares are shares that a UK company has agreed it will or might buy back at a future date.

When company shares are redeemable, the shareholder still retains the right to sell their shares or transfer them to somebody else – as long as that sale or transfer follows all of the rules outlines in the company’s articles of association as well as any shareholders’ agreement.

Redeemable shares are often a type of “preference share”. That means ownership of a redeemable share may entitle the shareholder to a fixed dividend – and payment of preference share dividends takes priority over payment to ordinary share dividends. Other preferential conditions include things like return of capital or voting rights. That being said, it’s important to note that not all redeemable shares are preference shares.

If a UK company does buy back redeemable shares, the redeemed shares are canceled and they will no longer form a part of the company’s share capital.

When are they redeemed?

When and how a share is redeemed will depend upon the company and the circumstances in which the shares were issued.

Redemption terms for buyback shares will usually be set out in the company’s articles of association. It should also be included in the other prescribed particulars for the redeemable shares in question.

Redemption terms generally include information about redemption dates, as well as any deciding factors for the redemption price. A redemption date can either be a date that is:

  • Fixed
  • At the discretion of company directors
  • At the shareholder’s option

In terms of redemption price, this is normally a fixed amount or an amount that’s calculated in a fixed way. For example, the redemption price could be fixed to match a particular nominal value or the share issue price. That said, a company can fix a redemption price to any amount.

Why issue redeemable shares?

UK company owners tend to issue redeemable shares for one of three reasons:

  1. To create an in-built exit strategy for shareholders
  2. To provide the company with some peace of mind that it can buy its shares back
  3. It can enable a limited company to return capital back to its shareholders without declaring a dividend.

It might help to take a look at an example.

Let’s say an investor puts £15,000 into your company on the understanding that they’ll get back a minimum of £35,000 after four years. To offer that investor some assurance they’ll be able to get that return on investment (ROI), your company might agree to issue them 100 redeemable preference shares at £150 each.

The preference on those shares could be the right to a cumulative annual divide of £30 each for five years, and then be redeemable by the end of the fifth year after the issue date at £230 per share.

But just because the shareholder reserves the right to redeem their shares on the redemption date doesn’t necessarily mean they have to. Likewise, it doesn’t always mean the full redemption price is going to be paid back to the investor if the company fails to accumulate enough distributable profits.

This merely offers both the company and its investors a viable path forward should they choose to end their relationship in the future. Meanwhile, it enables the company to return some capital back to its investors on a fixed basis without having to declare dividends.

What is the procedure for a redemption of shares?

The process that needs to be carried out upon redemption will depend on a number of factors. This may include:

  • The company’s articles of association
  • The prescribed particulars of the shares
  • The way in which the redemption is being financed
  • Relevant shareholders’ agreements

If the shares have been redeemed by the company in line with the share issue documents and the company’s article of association, shareholders don’t normally need to approve of the redemption. Meanwhile, if the shares have been redeemed by the holder of the redeemable shares, it is common for the process to begin with said holder serving notice to the company.

As long as the company has sufficient distributable reserves (or is issuing new shares to generate cash), the company directors just need to approve the redemption with the passing of a board redemption.

That being said, shareholder approval needs to be gained if the company’s articles of association or any relevant shareholders’ agreement dictate that a redemption must be approved by shareholders.

When redeemable shares are being purchased and it’s not in accordance with the company’s articles of association, the buyback of shares needs to be treated as a “purchase of own shares”. In that case, you’d have to fulfil the requirements for this process, instead.

You’ve got to note that there are some statutory restrictions around the redemption of shares, too. The primary requirement is that the company can only redeem those shares out of its distributable reserves (or “accumulated profits”). If the company hasn’t got enough reserves to buy back the shares, it will need to issue new shares to finance the purchase.

That being said, private limited companies also have the option to finance a redemption out of capital (either in part or in full). But in order to go this route, all distributable reserves and proceeds of new shares issued have got to be used first. This process is called a “permissible capital payment”.

What are the requirements for redeemable shares?

Although limited companies are free to issue redeemable shares as required, it’s important to note that there are rules and requirements about how they’re issued.

The rules for redemption shares are typically spelled out in a company’s articles of association – but it’s critical that the shares are issued as redeemable. Shares issued without redemption rights cannot be converted at a later date.

It’s also worth remembering that, in order to issue a redeemable share, you must have at least one non-redeemable share in issue.

Next, there are some rules around share redemptions and record-keeping. If a shareholder redeems their shares, the company is then required to:

  • Keep a copy of the resolution of directors and any resolution by shareholders approving the redemption.
  • Record any associated transactions in the limited company’s accounting records. This may include payment for redemption, as well as the amount of the redemption paid out of distributable reserves.

There are a couple of extra rules if you’re running a private limited company and the redemption in question is being funded (or partly funded) out of capital. In this case, you’ll also need to keep copies of:

  • The directors’ statement of solvency
  • Any special resolution validating the share redemption
  • Auditors’ reports (if relevant)
  • A notice published in the London Gazette or a national newspaper
  • A record of notification to all creditors

If the redemption in question was approved by the company’s shareholders, you’ll also need to file a copy of the shareholders’ resolution with Companies House — the UK Government’s official company registrar.

In all cases of redemption, the company will need to update its register of members as well as complete and submit Form SH02 to Companies House. This form can be submitted to Companies House either by post or by uploading it online, but this must be done within 30 days of the redemption taking place.

What are the best alternatives to redeemable shares?

If a private company isn’t in a position to issue redeemable shares – or it simply doesn’t sound like they’re the right fit for a company – you do have a couple of other options.

The first option is to carry out a purchase of own shares.

If you’re purchasing your own shares, the shares the company buys back will either be immediately canceled or held by the company in treasury.

By carrying out a purchase of own shares, the company can buy out shareholders that no longer wants to be involved with the company, have died, or simply want to retire.

Another alternative you might wish to pursue is a reduction of capital. There are a couple of different ways a company can achieve a reduction of share capital. Private companies complete a reduction of share capital that is either supported by a solvency statement or is confirmed by a court order. Public limited companies, meanwhile, require a court order and cannot make use of the solvency statement procedure.

To complete a reduction of share capital, a company will need to fulfil a certain number of legal requirements. After those requirements have been fulfilled, the company must the reduction of share capital documentation to Companies House for processing and approval. This needs to be done by completing and submitting Form SH19 alongside the relevant copies of any shareholders’ resolution, and any director’s solvency and compliance statements.

Because it can be slightly more complicated to complete a capital share reduction, it’s recommended that you get professional legal and taxation advice before proceeding.

The bottom line

Redeemable shares can be a smart tool to help a limited company protect its ability to buy back shares in the future – while simultaneously giving investors a little peace of mind that they’ll be able to recoup the cash they’ve put into the company.

But it’s important to bear in mind that the decision to issue redeemable shares is a big one. There is a range of considerations, and redeemable shares may not be right for every company. That’s why it’s critical you speak to professionals before proceeding.

Want to add redeemable shares to your company? Get in touch with Linnear COSEC’s team of experts to help you.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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