Redeemable shares constitute a type of preference shares that can be bought back (i.e., exchanged, most likely for cash) by the issuing company, at the option of the issuing company or the holder, at a pre-determined price and at or after a pre-determined time.
Some of the salient points about redeemable shares:
- Redeemable shares can be used as a mechanism for returning surplus capital to shareholders.
- Redeemable shares can be redeemed by the issuing company at a predetermined price, and at or after a predetermined time.
- There are two main categories of redeemable shares – with a maturity date or perpetual.
- Redeemable shares cannot be the only type of shares a company has, and the company must have at least one non-redeemable share in issue.
- Mandatory redeemable shares are often used by employers to employees as a compensation kicker.
A limited company may issue redeemable shares, subject to (i) any prohibitions or restrictions in its article of association; and (ii) the company having at least one non-redeemable share in issue (section 234 of the Companies Ordinance (Cap 622)).
Accordingly, a company cannot be incorporated with only redeemable shares, and it cannot buy-back all of its shares leaving only redeemable shares in issue (section 236 of the Companies Ordinance).
A company cannot amend the terms attaching to an existing class of non-redeemable shares to create a class of redeemable shares. Shares which are to be redeemed must be issued as redeemable shares from the outset (Re St. James’ Court Estate Ltd  Ch 6). However, in Re Forth Wines Ltd, Petitioners 1993 SLT 170 it was held that non-redeemable shares may be converted into redeemable shares under an authorised reduction of capital.
Certain restrictions may be contained in the company’s articles of association. Care must be taken to ensure that any issuance and subsequent redemption of redeemable shares are in compliance with the terms in the articles of association of the company.
Terms of redeemable shares
Companies have the flexibility in setting the terms and conditions of redemption of redeemable shares, which would include:
- Redemption time – specific time or date, period, or in tranches.
- Who has the right to exercise the redemption right (e.g. holder of the redeemable shares, directors of the company, shareholders of the company).
- Redemption price – fixed price or based on a formula.
Financing a redemption
Redemption price should be satisfied in cash, and the company can fund a redemption by:
- From distributable profits
- From proceeds of a fresh issue of shares made for the purpose of the redemption
- Out of capital
The Companies Ordinance imposes a general prohibition on financial assistance for acquisition of own shares (i.e., if someone is acquiring or proposing to acquire shares in a company, the company or any of its subsidiaries must not give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place). Section 277 of the Companies Ordinance expressly provides an exception on the prohibition on financial assistance for a share redemption conducted in accordance with the Companies Ordinance.
Possible for a company to suspend redemption?
The ability of a company to suspend the redemption of shares and the payment of redemption proceeds depends on the construction of its articles of association, or the terms of the redeemable shares.
Failure to redeem redeemable shares
If a company agrees or is liable to redeem any of its shares but fails to do so, the company is not liable in damages in respect of that failure in accordance with section 271 of the Companies Ordinance.
The holder of the redeemable shares may seek specific performance from the court requiring the company to redeem the shares. However, a court must not grant an order for specific performance of the terms of the redemption if the company shows that it is unable to make a payment in respect of the redemption out of distributable profits – section 271 of the Companies Ordinance.
The following issues should also be considered when issuing or exercising one’s redemption rights:
- Can one object to a redemption out of capital?
- What would happen if the company becomes insolvent shortly after redemption? Would the directors be personally liable?
- What needs to be done following redemption?
- The additional regulatory requirements when the issuer is a public company.
If you would like to find out more about the contents in this note or other issues pertaining to redeemable shares, please contact us.
Alfred Leung, Partner
(E: firstname.lastname@example.org; T: +852 3468 7202)
YTL LLP is a law firm headquartered in Hong Kong, China. This article is general in nature is not intended to constitute legal advice