Redemption Of Shares - Business Law and Practice

Redemption of Shares

Redeemable Shares

Redeemable shares are shares which are issued which entitle the company to redeem them at the option of the company according to a formula or price that is predetermined.

All the rights of redeemable shares are set out in the Articles of the company at the time of issue (s.685(3)). The Articles must not prohibit or restrict the issue or redemption of redeemable shares (s.684(2))

Funding a Redemption

Shares can be redeemed using one of the following funding methods:

Capital (s.678(1)) which is the amount invested by the shareholders that cannot be distributed to protect creditors. There are additional restrictions on redeeming shares using capital.

Distributable profits (s.687(2)(a)) are the working profits of the company with all of the losses deducted off the profits.

Fresh issue of shares (s.687(2)(b)) can be used to fund the redemption of shares as long as the new shares were issued for the sole purpose of funding the redemption.

The funding of the redemption must first be done using the distributable profits. If more money is required then capital can be used to fund the rest of the redemption.

Procedure Plans