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.
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).
The unique feature of redeemable shares provides flexibility to both companies and shareholders, making them a popular choice in the following circumstances:
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.
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:
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:
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.
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:
Limited companies may finance the redemption of shares in the following ways:
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
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.
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 .