Redeemable preference shares are a type of preference share. A company issues them to shareholders and later redeems them. This means the company can buy back the shares at a later date. Non-redeemable preference shares do exist, although companies cannot redeem them. This article provides 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. The Corporations Act provides that a company’s power to issue shares includes the power to issue preference shares. This includes redeemable preference shares. However, the terms of the redeemable preference shares, including when a company can redeem them, must be:
- approved by a special resolution of shareholders; or
- set out in the company’s constitution.
2. What Are the Key Terms of Redeemable Preference Shares?
Companies issue redeemable preference shares on the terms that they are liable to be redeemed. They are redeemable 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 are in respect of:
- repayment of capital;
- participation in surplus assets and profits;
- cumulative and non-cumulative dividends;
- voting; and
- priority of payment of capital and dividends in relation to other shares or classes of preference shares.
3. Does ASIC Need to Be Notified of an Issue of Redeemable Preference Shares?
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.
Redeemable preference shares are classified under ASIC’s share class code “REDP”.
4. When Can a Company Redeem These Shares?
A company can only redeem redeemable preference shares per the terms upon which the shares are on issue. The company cannot redeem the shares unless they are fully paid-up and out of profits, or the proceeds of a new issue of shares is 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 contravention, such as a director, may face penalties.
5. Is Shareholder Approval Necessary to Approve the Redemption of Redeemable Preference Shares by the Company?
Shareholder approval is not necessary to approve the redemption of shares, so long as the company redeems the shares on their terms.
6. How Much Will Shareholders Be Paid For Their Redeemable Preference Shares When They Are Redeemed?
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. Such reduction has to be approved by special resolution of the redeemable preference shareholders, as well as by a company resolution in a general meeting.
Furthermore, a company can redeem shares under a selective buy-back on terms which 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 to pay for the shares 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 of a Completed Redemption in Respect of Redeemable Preference Shares?
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. The 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 be taken to incur a debt in respect of redeemable preference 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.
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. If you are considering issuing redeemable preference shares, contact LegalVision’s business lawyers at 1300 544 755 or fill out the form on this page.
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