Redemption of Own Shares

If it has authority to do so, a limited company can issue shares which are to be redeemed or liable to be redeemed at the option of the company or the holder of the redeemable shares. Redeemable shares give the shareholder temporary membership in the company since shares issued as redeemable shares have the rights to be bought back (redeemed) by the company or the holder at a future date.

It must be noted that a company cannot issue all shares as redeemable shares, it must also have non-redeemable shares in issue at the time of the redemption.

Upon redemption, the redeemed shares are treated as cancelled and the amount of the company's share capital is reduced.

A company can redeem (purchase) redeemable shares:

1. Out of profits;
2. From the proceeds of a new issue of shares; or
3. Out of capital.

In order for a private company to redeem shares in itself out of profits a number of conditions must be met:

1. The redemption of shares must not be restricted or prohibited by the Articles of Association. The Model Articles introduced by the Companies Act 2006 allow the company to issue shares which are to be redeemed, or are liable to be redeemed at the option of the company or the holder, and the directors may determine the terms, conditions and manner of redemption of any such shares. Table A allowed a company to issue shares which are to be redeemed, or are liable to be redeemed at the option of the company or the holder, but the terms of redemption needed to be specified in the Articles. If the Articles contain a restriction, they need to be amended by Special Resolution;
2. The shares being purchased by the company must be fully paid;
3. As a result of the redemption of its own shares the company must continue to have shares in issue that are non-redeemable shares.

Financing Of The Redemption Of Shares

The shares may be redeemed out of distributable profits or out of the proceeds of a new share issue.

Any premium payable on the redemption by a limited company of its own shares must be paid out of distributable profits of the company. If however the shares to be redeemed were issued at a premium, any premium payable on their redemption by the company may be paid out of the proceeds of a fresh issue of shares made for the purpose of financing the redemption.

The amount of premium which may be paid will be the lesser of either:

1. The aggregate of the premiums received by the company on the issue of the shares redeemed, or
2. The current amount of the company's share premium account (including any sum transferred to that account in respect of premiums on the new shares).

The amount of the company's share premium account will be reduced by a sum corresponding (or by sums in the aggregate corresponding) to the amount of any premium paid.

Articles Of Association

Under the Companies Act 2006 all companies formed after 1st October 2009 will, by default, adopt standard Articles of Association unless specific Articles are drawn for that individual company. For many companies that were incorporated before this date it is perhaps advisable for companies, (both public and private), to review their articles of association with a view to bringing them into line with the 2006 Act.

NOTE: Articles of Association will need to be amended to enable a company to issue redeemable shares and determine the conditions and manner of redemption, alternatively they can be replaced with the 2006 Model Articles of Association.

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