To raise capital for the future growth and operations of your company, you can create and issue shares. There are various classes of shares that you can allocate to potential shareholders, including redeemable preference shares which are a type of preference share.
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What are they?
The Corporations Act 2001 (the Act) is the federal legislative instrument that regulates companies. Chapter 2H in Volume 1 of the Act governs how and what shares a company can issue – preference shares being one class included.
A preference share is a type of share that gives shareholders priority or ‘preference’, over ordinary shareholders, to dividends and/or company assets in liquidation. So, a redeemable preference share is a preference share that is liable to being reclaimed or ‘redeemed’ by the company. Essentially, issuing out a redeemable preference share gives the company the ability to buy back the share at a later date. Once redeemed, the share is cancelled.
Key terms of redeemable preference shares
To validly issue redeemable preference shares, the terms of issue must specify that they are liable to be redeemed and under what circumstances. This could be:
- at a fixed time or the happening of a particular event; or
- at the company’s option; or
- at the shareholders option.
Accordingly, the key terms of redeemable preference shares, and the rights and restrictions attached to the shares, will be decided by one of two ways. Either:
- set out in the company’s constitution; or
- agreed and approved by shareholders by way of special resolution.
Further, such terms that the special resolution or constitution will decide upon, as specified in section 254A(2) of the Act, include:
- 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
When can a company redeem the shares?
Redeemable preference shares are only redeemable as per the terms upon which the shares were issued. For example, if the terms of issue say the share is redeemable at the discretion of the company after 3 years of issuing, then a company can redeem the share at any point after 3 years.
In addition to this, a company can only redeem redeemable preference shares if:
- the shares are fully paid-up, meaning paid in full in accordance with the share price specified in the share terms; and
- the shares are out of profits or the proceeds of a new issue of shares made for the purpose of redemption
Additionally, it’s important to know that if you are a company and you are issuing or redeeming any type of share, you provide the required information to the Australian Securities and Investments Commission (ASIC). Accordingly, find more information on what you need to inform ASIC on and how, here.
Final thoughts
In summary, redeemable preference shares are shares that are liable to being redeemed by the company after issuing. It’s important to know what they are and how they may benefit the share structure of your company. Further, there are various steps to take when allocating redeemable preference shares and it can become complex. So, it is highly advisable that you seek the advice of a company lawyer for your company.
