Division 5 of Part VI of the Companies Act 1997 creates a share with a built-in exit.
Section 59 — the definition
(a) at the option of the company; or
(b) at the option of the holder; or
(c) on a date specified in the constitution,
for a consideration that is — (d) specified; or (e) to be calculated by reference to a formula; or (f) required to be fixed by a suitably qualified person who is not associated with or interested in the company.
A share is redeemable only where the constitution so provides. A company with no constitution cannot issue redeemable shares, and a side agreement to buy shares back is not redemption — it is a purchase, governed by sections 56 and 57.
The consideration must also be fixed by one of the three permitted methods. “Such price as the board decides” does not satisfy paragraphs (d) to (f); an independent valuer under paragraph (f) must be suitably qualified and not associated with or interested in the company.
Section 39(2) confirms that the abolition of par value does not prevent the issue of a redeemable share, and section 38(2)(a) lists redeemability as one of the ways shares may differ.
The three triggers compared
| s 60 — company’s option | s 61 — holder’s option | s 62 — fixed date | |
|---|---|---|---|
| Who decides | The company | The holder, by proper notice | Nobody — the date arrives |
| Treated as an acquisition under s 57(2) and (3)? | Yes | No | No |
| A distribution for s 50? | Yes | No | No |
| Deemed a distribution for s 54(1) and (5)? | Yes, via s 50 | Yes | Yes |
| Status of the former holder | Paid as part of the distribution | Unsecured creditor from the date of redemption | Unsecured creditor from that date |
| Share cancelled | On acquisition — s 56(3) | On the date of redemption | On that date |
Section 60 — redemption at the company’s option
A redemption at the option of the company is — (a) an acquisition by the company of the share for the purposes of section 57(2) and (3); and (b) a distribution for the purposes of section 50.
So the full buy-back machinery applies. The board must resolve that the acquisition is in the best interests of the company, that the terms and consideration are fair and reasonable to the company, and that it holds no undisclosed information making the terms unfair to accepting shareholders — and it must send the section 57(3) disclosure document to every shareholder. On top of that, section 50 requires the solvency certificate.
Section 55 adds a further point: where the redemption cancels or reduces a shareholder’s liability to the company, that reduction is itself treated as a distribution.
Sections 61 and 62 — the company has no choice
Where the holder gives proper notice requiring redemption — (a) the company shall redeem the share on the date specified in the notice, or if none is specified, on the date of receipt; (b) the share is deemed cancelled on the date of redemption; and (c) from that date the former shareholder ranks as an unsecured creditor of the company for the sum payable.
Where a share is redeemable on a specified date — (a) the company shall redeem it on that date; (b) it is deemed cancelled on that date; and (c) from that date the former shareholder ranks as an unsecured creditor.
Under both sections the shareholder stops being a shareholder and becomes an unsecured creditor — even if the company has not paid. That is a substantial improvement in position: in a liquidation, creditors are paid before shareholders.
Neither redemption is a distribution for sections 50 and 51 — so no solvency certificate is required — but both are deemed distributions for section 54(1) and (5). The company can therefore recover the payment from the former holder if it did not satisfy the solvency test, subject to the three-limb defence, and the Court’s section 54(5) proportionality power applies.
Where a company has issued shares redeemable on a specified date and does not redeem them by that date, it shall immediately after that date submit a notice in the prescribed form to the Registrar of the number of shares that have not been redeemed. Failure to do so is an offence by every director, penalty as in section 414(2).
Note that the share is still deemed cancelled on the specified date and the holder is still an unsecured creditor — the company’s failure to pay does not restore the shareholding.
Using redeemable shares in practice
- Finite-term investment. An investor takes redeemable preference shares redeemable on a fixed date — equity for the company’s balance sheet, with a defined exit.
- Staged buy-out of a founder. Redeemable at the company’s option in tranches, subject each time to section 57 and the solvency test.
- Employee shares. Redeemable at the company’s option on the employee leaving, at a formula price under section 59(e).
- Joint venture. Redeemable at the holder’s option on defined events, giving a partner a way out without needing a buyer.
- Put the redemption terms in the constitution — and remember that under section 43(3)(b) approved terms of issue are deemed to form part of it.
- Choose the consideration method deliberately. A formula is certain but can produce a value nobody expected; an independent valuer is fair but slower and dearer.
- Specify what “proper notice” means for section 61, and what happens if the company cannot pay.
- Model the solvency position before committing to a fixed date redemption. Section 62 gives the company no discretion to defer.
- Remember section 56(4): a notice of the number and class of shares redeemed must be filed immediately.
Sources
- Companies Act 1997 — ss 38, 39, 43, 50, 51, 54–57, 59–62, 414
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.