Redemption of redeemable shares – The Law Student Blog

General

Redeemable shares give the holder temporary membership in the company. They are issued as redeemable shares – they are to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder. All details of the redemption, including date of redemption and the price to be paid at that date, will either be in the articles or determined by the directors.

As a result, a contract is not required to redeem shares, irrespective of the source of funding used. This is because the terms of the redemption have already been set out in the company’s articles of association (or determined by the directors) prior to the shares being allotted.

Redemption out of profits or the proceeds of a fresh issue of shares

A company’s redeemable shares may be redeemed out of profits or the proceeds of a fresh issue of shares for the purpose of the redemption, if the following conditions are met:

The articles of association of a private company may exclude or restrict the issue of redeemable shares (s 684(2) CA 2006).
Under s.684(3) CA 2006 public companies are required to have an express authority in their articles to issue redeemable shares.
The company must also have non-redeemable shares in issue at the time it issues redeemable shares (s.684(4) CA 2006). This is because if it did not, and the redeemable class of shares were redeemed by the company, the company would be left with no issued share capital.
The shares to be redeemed must be fully paid up (s.686(1) CA 2006).
The terms of the redemption must be set out in the articles (s. 684(4) CA 2006). The exception to this is that the articles, or an ordinary resolution, may provide that the directors can determine the redemption rights attaching to such shares (s. 685(1) CA 2006). If the directors determine the redemption rights, they must do so before the shares are allotted (s.685(3) CA 2006).
No shareholder resolution is required under CA 2006.
The redeemed shares are treated as cancelled (s.688 CA 2006).
Notification must be sent to Companies House within one month of redemption together with a statement of capital (ss. 689(1), 689(2) and 685(3)(b) CA 2006).

Redemption out of capital

Only private companies are permitted to fund a redemption of their own shares out of capital (s.687(1) CA 2006).

The following conditions must be fulfilled in order for a redemption to be funded out of capital:

check the articles of the company – a redemption from capital must not be restricted or prohibited by the articles (s.709(1) CA 2006);
see if the company has any distributable profits available to fund the purchase – if it does, those distributable profits (or funds from a fresh issue of shares for the purpose) must first be used to fund the own share purchase before capital can be used (s.710 CA 2006). The ‘permissible capital payment’ (s. 710(2)) may only be used if that company’s distributable profits are insufficient to fund the total cost of the purchase; and
check that the accounts used to determine the distributable profits were prepared to a date no more than three months before the date of the directors’ statement given under s.714 CA 2006 (see below) (s.712(7) CA 2006).

Where distributable profits are being used wholly or partly to finance the redemption of shares, the amount of distributable profits available should be verified by the company’s accountants. Likewise, if the directors conclude that a payment should be made out of capital, this view should be verified by the accountants.

Provided that the above conditions have been fulfilled, the further documentation required to effect the payment out of capital is set out in s.713 CA 2006 and is as follows:

a written statement of solvency made by the directors of the company. By making this statement, the directors of the company are stating that they believe that the company is able to pay its debts as they fall due from the date immediately after the payment out of capital is made and that it will continue to be able to do so for a period of 12 months (s.714(3) CA 2006);
an auditors’ report, which is annexed to the written statement of solvency (s.714(6) CA 2006); and
a special resolution to approve payment out of capital – to be passed on (or within a week after) the same day as the directors sign the written statement of solvency (s.716(1),(2) CA 2006).

The procedure and timing for use of capital to fund a redemption of redeemable shares is as follows:

A board meeting of the company must be held to call a general meeting on at least 14 clear days’ notice (unless either the short notice or written resolution procedure is used).
The directors’ statement and auditors’ report must be finalised and signed on the day of (or within 7 days prior to) the general meeting (s.716(2) CA 2006).
A general meeting must be held (unless the resolution is to be passed as a written resolution), at which a special resolution to approve the payment out of capital is to be passed. The shareholder whose shares are being redeemed can vote on the resolution at a general meeting but the resolution will be ineffective if his votes in respect of the shares being redeemed carry the resolution (s.717(3) CA 2006). Therefore that shareholder should be advised to abstain – unless some, but not all, of his shares are to be redeemed, in which case he may safely vote on a poll in respect of the shares that he is keeping. If the resolution is passed as a written resolution that shareholder is disenfranchised for that vote (s.717(2) CA 2006).
Under s.719(1) CA 2006, the company must publish a notice in the Gazette within the week immediately following the date of the special resolution approving the payment out of capital. The notice must state:
- that the company has approved a payment out of capital for the purpose of redeeming its own redeemable shares;
- where the directors’ statement and auditors’ report are available for inspection;
- that any creditor of the company may, at any time within the five weeks immediately following the date of the resolution, apply to the court under s.721 CA 2006 for an order preventing the payment.

Within the week immediately following the date of the special resolution, the company must also publish a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to that effect to each of its creditors (s.719(2) CA 2006).

The company must (i) deliver a copy of the directors’ statement and auditor’s report to Companies House on or before the day its first notice is published and (ii) make those documents available to any shareholder or creditor of the company for inspection, without charge, from the day its first notice is published until five weeks have passed since the special resolution approving the payment out of capital (ss.719 and 720 CA 2006).

The redemption can take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s.723 CA 2006). This period cannot be reduced even if the special resolution is passed unanimously – the five week delay is designed to enable shareholders (who did not approve the resolution) and/or creditors of the company to object to the payment out of capital by lodging an application at court for cancellation of the resolution (s.721 CA 2006).

Shareholders who vote in favour of the resolution cannot object and so if the resolution is passed unanimously there can be no objection by the shareholders (although creditors can still object). The seven week longstop period is intended to ensure that the view formed by the directors in their statutory declaration as to the solvency of the company is still likely to be accurate at the time the redemption is made.

The redeemed shares are treated as cancelled (s.688 CA 2006).
Notification must be sent to Companies House within one month of redemption together with a statement of capital (ss. 689(1), 689(2) and 685(3)(b) CA 2006).

Deferred payment for redemption

When redeemable shares are redeemed by the company, the company must pay the selling shareholder for their shares at that time. Only if the terms of the redemption so specify may the shareholder agree with the company to be paid on a date later than the redemption date (s.686(2) CA 2006).