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Redeemable preference shares are a type of preference share. A company issues them to shareholders and later redeems them. This means that the company can buy back the shares at a later date. Non-redeemable preference shares do exist, although companies cannot redeem them. In this article, we provide answers to ten frequently asked questions (FAQs) about redeemable shares, so you know what to expect when issuing them.

1. Who Has the Power to Issue Redeemable Preference Shares?

A company has the power to issue redeemable preference shares under the Corporations Act 2001. Specifically, the Corporations Act provides that a company has the power to issue shares, such as redeemable preference shares. However, the terms of these shares, including when a company can redeem them, must be:

2. What are the Key Terms of Redeemable Preference Shares?

The most fundamental term of any redeemable preference share is that the company must redeem them (i.e. repurchase them) at some point in time. When a company issues these shares they must include the circumstances in which the shares must, or can be redeemed. Some common examples include redemption at:

  • a fixed time or on the happening of a particular event;
  • the company’s option; or
  • the shareholder’s option.

A special resolution agreed to by shareholders or the company’s constitution will set out the key terms of the redeemable preference shares. These terms include:

  • when the company will repay shareholders the initial price of their shares;
  • when shareholders have the right to be the company’s assets and profits.

Additionally, the terms of the redeemable shares will also detail whether shareholders:

  • are entitled to cumulative or non-cumulative dividends;
  • have the right to vote; and
  • have the right to be paid in priority in comparison to shareholders holding shares of a different class.

3. Does ASIC Need to Be Notified of an Issue of Redeemable Preference Shares?

ASIC needs to be notified of an issue of redeemable preference shares. Importantly, a company needs to lodge with the Australian Securities and Investments Commission (ASIC) the following forms within 14 days of the share issue:

  • form 2205 notification of resolutions regarding shares; and
  • form 210 notification of statement or special rights carried by shares.

ASIC classifies redeemable preference shares under the share class code “REDP”.

4. When Can a Company Redeem These Shares?

A company can only redeem these shares following terms as set out in its constitution. Parties must include some terms for any redeemable preference share, such as that the company cannot redeem the shares unless they are fully paid up. 

Further, the redemption payment must be made from the company’s profits, or the proceeds of a new issue of shares are made for the purpose of redemption. These restrictions exist to prevent redemption from reducing a company’s capital to the potential disadvantage of creditors.  

Even if a company redeems the shares without meeting the requirements, the company will not be guilty of an offence. Furthermore, the redemption transaction will still be valid. However, any person involved in the infringement, such as a director, may face penalties.

5. Is Shareholder Approval Necessary?

Shareholder approval is not necessary to approve the redemption of shares, so long as the company redeems the shares on their terms. Again, these terms will either be outlined in the company constitution or they will have recieved approval through a special resolution of the company’s shareholders.

6. How Much Will Shareholders Be Paid?

Once the company has redeemed the shares, it will pay the shareholder. The company will pay them in accordance with the share price in the terms for the shares.

7. What Happens to These Shares When the Company Redeems Them?

Upon redemption, the redeemable preference shares are cancelled. You should remember that a company’s redemption of the shares eliminates any dividend rights attached to them. An exception to this is where the terms of issue specify otherwise.

For example, the terms may specify that shareholders will receive a dividend payment out of any profits the company has made on completion of the redemption. 

8. Are There Other Ways the Company Can Buy Back Redeemable Preference Shares?

A company can redeem and cancel shares in a selective reduction of capital. However, such reduction must be approved by special resolution of the redeemable preference shareholders and a company resolution in a general meeting.

Furthermore, a company can redeem shares under a selective buy-back on terms that are different from the original share terms. To do this, the shareholders having their shares bought back need to accept the buy-back terms. If shares are bought back in this way, the funds do not need to be paid out of profit. However, the buy-back rules require that the redemption must not materially prejudice the company’s ability to pay its creditors.

9. Does the Company Need to Notify ASIC?

The company must lodge a Form 484 with ASIC to notify it of a completed redemption of redeemable preference shares. It needs to lodge the form within a month of the cancellation of the shares. Form 484 sets out:

  • the number of shares cancelled;
  • any amount paid by the company (in cash or otherwise) upon the cancellation of the shares; and
  • the class to which the cancelled shares belonged.

The same requirement applies in respect of a completed buy-back or capital reduction of redeemable preference shares.

10. Are Redeemable Preference Shares a Debt Interest or Equity Interest?

Redeemable preference shares are hybrid securities, which generally combine debt and equity. Depending on their terms, the Australian Taxation Office (ATO) may classify them as a debt interest rather than an equity interest. This may have tax implications for shareholders.  

Furthermore, directors should note that companies will incur a debt regarding these shares for the purposes of the insolvent trading provisions of the Corporations Act. This happens where a company exercises its option to redeem the shares or issues redeemable preference shares that are redeemable otherwise than at the option of the company.

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Key Takeaways

Companies can issue redeemable preference shares to shareholders and later redeem them on terms pre-agreed with the shareholder. The company may have the right to buy back shares at a fixed time, on the occurrence of a particular event or at the option of the company or shareholder. Furthermore, the company will buy back the shares at the purchase price set out in terms of the issue of the shares. In doing so, it is important for the company to notify ASIC through lodging a Form 484, setting out the number of hsares cancelled, amount the company paid and the class to which the cancelled shares belong. The system of redeemable preference shares combine debt and equity interests, however, the ATO will usually classify them as a debt interest, creating tax implications for shareholders.

For more information on issuing shares, LegalVision’s business lawyers can help. You can contact them on 1300 544 755 or fill out the form on this page.

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