How to Buy Back Shares, Purchase Own Shares or Redeem Shares

There are two types of situations when a company can buy its own shares:
- Purchase of own shares;and
- Redemption of redeemable shares.

Generally, a private limited company may decide to purchase its own shares in order to prevent a shareholder being locked into the company with no way to sell his shares.

There are very strict rules that companies must follow for the purchase or redemption of shares.

A company can purchase or redeem its shares:
- out of profits;
- the proceeds of a fresh/new issue; or
- out of capital.

It should be noted that the rules that a company must follow for the first two methods are less stringent than the rules that must be followed for the latter.

Also, 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.

Upon redemption and purchase of own shares, the purchased shares are treated as cancelled and the amount of the company's issued share capital is reduced, however, the authorised share capital remains the same.

Own Share Purchase

A purchase of own shares takes place when a company purchases shares in itself from an existing shareholder and the shares purchased are not redeemable shares.

There are two methods of making a purchase of own shares:
- an off market purchase; or
- a market purchase.

The difference between the two is that in the off market purchase the purchase of own shares by a company takes place otherwise than on a recognised investment exchange. On the other hand, in the market purchase the purchase of own shares takes place on a recognised investment exchange.

Before a private limited company can make an own share purchase out of profits or the proceeds of a fresh issue of shares or out of capital several conditions must be fulfilled.

Redemption of Shares

A limited company can issue shares which are to be redeemed or liable to be redeemed at the option of the company. 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 at a future date.

A company can only issue redeemable shares if the Articles of Association provide for it. Also, all the details of the redemption, including the date of redemption and the price to be paid for the shares at that date, will be contained in the Articles.

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 buy back.

Once all of the conditions required have been satisfied then a company can use capital in order to redeem the redeemable shares.