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Companies: redeemable shares
 

 

Traditionally, companies have been able to issue redeemable preference shares. The Companies Act 1981 gave companies power to issue redeemable ordinary shares provided that certain conditions were observed. Briefly, these are: (1) the Articles must give this power and specify the manner in which redemption is to take place; (2) after redemption there must still be in issue shares which are not redeemable. This prevents companies buying in all shares and thereby ceasing to have any members; (3) the shares to be redeemed must be fully paid; (4) redemption must be effected out of profits available for distribution or out ot the proceeds of a new issue made for purposes of the redemption; (5) the redemption must be paid for at the time the shares are redeemed, i.e. shares cannot be redeemed on credit; (6) shares redeemed must be cancelled. This reduces nominal capital but not authorized capital. If the nominal capital of a public company is reduced by redemption, care must be taken that it does not thereby fall below the minimum required to keep its status as a public company; (7) an amount equal to the nominal value of shares redeemed must be transferred to capital redemption reserve. The amount so transferred may be reduced by the nominal value of any new shares issued for purposes of the redemption. The effect of this is to preserve capital intact for protection of creditors; (8) after redemption there must still, of course, be at least two members.

If a new issue for purposes of redeeming existing shares is mooted, it will not matter if that issue would exceed authorized capital, provided that after redemption the total shares in issue are within the limit. Any premium paid on redemption must be paid out of distributable profits. Proceeds from any new issue can be used to pay this premium where the shares to be redeemed were themselves issued at a premium to the extent of that premium or to the balance on the share premium account if lower. The amount so paid by way of premium on redemption must be matched by an equivalent transfer to share premium account.

Private companies may, if their articles permit, redeem shares out of capital to the extent that the balance of distributable profits plus proceeds of any new issue are insufficient.

 

Reference: The Penguin Business Dictionary, 3rd edt.