Guidance Note: Redemption Out Of Profits/New Share Issue
There are two types of situations when a company can buy its own shares:
- Purchase of own shares; and
- Redemption of redeemable shares.
A company can redeem redeemable shares:
- out of profits;
- from the proceeds of a new issue of shares; or
- out of capital.
There are very strict rules that companies must follow for the purchase or redemption of shares.
This document deals with redemption of redeemable shares out of profits/new issue of shares; for an own share purchase please see “Own Share Purchase Out of Profits/New Share Issue/Cash – Guidance Notes” or “Own Share Purchase Out of Capital – Guidance Notes” and for redemption of redeemable shares out of capital please see “Redemption out of Capital – Guidance Notes”.
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.
Please note that both private and public companies can purchase their own shares or redeem redeemable shares, but only private companies can reduce their capital in order to do so.
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