Issuing redeemable shares
Companies can generally issue redeemable shares (or convert existing non-redeemable shares into redeemable shares) if permitted by their articles of incorporation. Redeemable shares may be redeemable at the option of the shareholder or the company.
Redemption of redeemable shares
A company can redeem its redeemable shares if:
- the directors who authorise the redemption approve a Solvency Certificate (as set out below); and
- the redemption complies with the relevant provisions of the company's articles of incorporation or the terms of issue of the shares.
A company may redeem a share whether or not it is fully paid. A company may not redeem the shares if, as a result of the redemption, it would have no members.
The Solvency Certificate
The redemption of shares by a company is considered to a distribution under the Law. Therefore, the directors who authorise the redemption must approve a certificate ("Solvency Certificate") stating:
- that they have formed the opinion that (a) immediately following the date of the redemption, the company will be able to pay its debts as they become due, and (b) having regard to the most recent accounts of the company and all other circumstances that the directors know or ought to know affect, or may affect, the value of the company's assets and the value of the company's liabilities and relying on the valuations of assets or estimates of liabilities that are reasonable in the circumstances, the value of the company's assets is greater than the value of its liabilities; and
- the grounds for that opinion.
A director who approves the Solvency Certificate without having reasonable grounds for the opinion expressed in it is guilty of an offence and, upon conviction, is liable to a fine, imprisonment for up to two years or both.
Funding a redemption
A redemption can be funded from any source, including from a nominal capital account or share premium account (for a par value company) or a stated capital account (for a no par value company).
The consideration for the redemption can be paid in cash, other assets, or a combination of the two.
What happens to redeemed shares?
The redeemed shares will be treated as cancelled on redemption and may not be held in treasury (such treatment only being available where a company acquires its own shares).
The information contained in this guide is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.
