A company may issue redeemable shares. This means that the company may repurchase and cancel them. Unlike other ordinary shares, they need not be locked into the company until liquidation. This facilitates investment in private limited companies. The abolition of capital duty further facilitates investment in shares.
Formerly, only preference shares could be redeemable. Since 1990, redeemable ordinary shares may be issued and companies may buy back their own shares. Certain strict conditions apply. At least one tenth of the nominal share capital was formerly required to be non-redeemable. This requirement has been removed by the 2014 Act.
A company may issue redeemable shares provided that it has power in its constitution/ articles of association. If the power is not there, it may be inserted by amendment. The power may be conferred by special resolution or by the terms of allotment of the shares.
Save to the extent the constitution otherwise provides, a company may by special resolution, subject to the provisions of the Act regarding the variation of class rights, convert any of its shares into redeemable shares. The conversion does not have effect with respect to any shares, the holder of which notifies the company, before the date of conversion, of his or her unwillingness to have his or her shares converted. Subject to this, the conversion shall have effect according to its terms.
Redemption of Shares
Shares may be redeemed only if they have been paid up in full. The redemption (or repurchase) of shares must generally be financed out of distributable company profits. See the other sections in relation to what qualifies as distributable profits.
As an alternative to redeeming the shares from profits, they can be redeemed out of the proceeds of a new share issue. The company is required to create a capital redemption reserve fund. This reserve is equivalent to capital and is subject to the general restrictions on redemption. It may be used to issue bonus shares.
If the shares are purchased from profits, the nominal value of the shares must be transferred to the capital redemption reserve fund. If they are redeemed from a fresh issue and the amount paid is less than the nominal amount, the shortfall is transferred.
When shares are redeemed, they must be cancelled or retained as treasury shares. Treasury shares have no rights to a dividend or voting rights. Treasury shares are frozen and made be re-issued.
Purchase of Shares
The common-law rule was that a company could not purchase its own shares. The “purchase” of shares by a company includes their acquisition by a nominee for it. In 1990, many of the historical restrictions on the purchase and redemption of capital were removed. The law was changed in order to facilitate investments in private companies, particularly by way of venture capital.
The 1990 reforms allowed for the purchase and redemption by a company of its own shares and those of its holding company, subject to compliance with conditions. The purchase must be funded out of profits available for distribution. The 2014 Act re-enacted this legislation with amendments. The former requirement for retention of 10% of shares as non-redeemable shares has been removed.
Where the company purchases its own shares, it must use its distributable profits and pay an equivalent amount to a capital redemption reserve fund. This is treated in the balance sheet as capital. It may be used for certain limited purposes only, such as to fund the issue of bonus shares which are fully paid up. It acts as substituted capital for the redeemed shares.
Where the shares being acquired were issued at a premium, some or all of the premium payable on their acquisition may be paid out of the proceeds of a fresh issue made for the purpose of the acquisition. This may be up to the amount of premiums received by the company on the issue of the shares acquired or the current amount of the company’s undenominated capital, whichever is less. In any such case, the amount of the company’s share premium account or other undenominated capital shall be reduced by a sum corresponding to the amount of payment made out of the proceeds.
Procedure for Purchase I
The acquisition by a company of its shares must be authorised by its constitution, the rights attaching to the shares or a special resolution. An off-market purchase by the company of its own shares must be approved in advance by special resolution. A general authority will suffice. The terms of the purchase and period of authority must be specified. The special resolution must authorise the terms of the repurchase contract.
The special resolution is not valid if it is carried using shares which are the subject of the resolution itself. The unanimous written resolution procedure is not available. The special resolution or the majority written resolution procedure is not effective unless it is carried without the shares, the subject of the resolution. Any member holding one or more shares carrying a right to vote may call for a poll.
Persons who hold the shares to be purchased must not vote on the resolution for approval. The proposed contract must be available for inspection at the registered office for at least 21 days before the passing of the resolution.
A company may acquire its own shares by purchase or in the case of redeemable shares, by redemption. The consideration for the acquisition must be paid out of profits available for distribution. Where the company proposes to cancel the shares on their acquisition, the consideration may be paid from the proceeds of a fresh issue made for the purpose of the acquisition.
Procedure for Purchase II
A company may purchase its own shares by a contingent purchase contract, under the authority of a special resolution. This entitles or obliges the company to purchase the shares at a future date. It facilitates an options instead of an obligation.
Copies of contracts for the purchase of shares must be kept at the registered office for 10 years afterwards. They must be available for inspection by any member, and in the case of a plc, to the public. It must be available for inspection at least two hours a day. The company and directors and officers in default are guilty of an offence, if they do not comply with this obligation.
Where a company is unable to fulfil a contract for redemption or purchase of shares, it is not liable in damages. The contract may not be enforced against it if there are insufficient distributable profits available to redeem. If the company is later wound up, the contract parties have a certain level of priority.
Procedure for Purchase III
The shares must be purchased out of distributable profits or the proceeds of a fresh issue. The requisite amount must be transferred to the capital redemption reserve fund. The shares must be cancelled or retained as treasury shares.
A return is required to the Companies Registration Office, giving certain details of the purchase. A company which has acquired shares pursuant to the above provisions must within 30 days after the date of delivery to the company of the shares, deliver to the CRO in the prescribed form, a return in relation fo the shares acquired. Contravention is an offence on the part of the company and officers in default.
The procedures for the purchase back of shares by a company by a public limited company differ. Higher levels of disclosure apply. Public limited companies can undertake market or off-market purchases. An off-market purchase is a private purchase, outside of an exchange. In the case of purchases on-market, there is likely to be a requirement to notify the stock exchange, which may publish the requisite information.
The Purchase Contract
The Acquired Shares
Shares acquired by the company in itself must be held as treasury shares or must be cancelled. Shares held in the company by any subsidiary and shares held by a nominee on the company’s behalf must be held as treasury shares. They may be re-issued. A company may not have more than 10% of its capital in treasury shares.
For as long as the company holds treasury shares, the company shall not exercise voting rights in respect of them. The purported exercise of such rights is void. No dividend or other payment shall be payable to the company in respect of those shares, including on a winding up.
Treasury shares may be cancelled or reissued. A re-issue is deemed to be an issue of shares without an increase in share capital for any purpose. The maximum and minimum prices at which the treasury shares may be re-allotted shall be determined by special resolution of the company prior to allotment. The allotment price range may be fixed and may be varied from time to time. There are special provisions in respect of public companies, dealing with the price at which treasury shares may be reissued.
The cancellation of acquired shares does not reduce the company’s authorised share capital. Where the shares are acquired out of the profits available for distribution or out of the proceeds of a fresh issue for that purpose, a sum equal to the nominal value of the shares must be transferred to the undenominated capital of the company other than its share premium account, the capital redemption reserve (which shall not be distributable).
Consideration for Acquisition
Any payment made by a company in consideration for the acquisition of its own shares must be made out of distributable profits or subject to conditions, out of the proceeds of a new issue of shares.
A company is not liable in damages for the failure to redeem or repurchase redeemable shares or shares agreed to be purchased under the above procedure and an order for specific performance may not be granted, if the company shows that it is unable to meet the cost of redeeming or repurchasing the shares, out of profits available for distribution.
On a winding up, sums due for the repurchase of redeemable shares and shares agreed to be repurchased under the above procedure, enjoy priority to amounts due to members/ shareholders. They rank behind sums due to other creditors of the company.
Acquisition of Shares in Holding Company I
By way of exception to the general prohibition, the acquisition and holding by a subsidiary of shares in its holding company are permitted subject to much the same conditions that apply to the acquisition by the company of its own shares. The shares may be acquired in a holding company out of the distributable profits, subject to certain conditions.
A contract for the acquisition (whether by allotment or transfer) by a subsidiary of shares in its holding company shall not be entered into without being authorised in advance both by the subsidiary and its holding company. The provisions applicable to the acquisition by a company of its own shares, applies, with the necessary modifications, to the granting, variation, revocation and release of such authority.
The following conditions apply to the acquisition of shares in the holding company
- the consideration for the acquisition of such shares is provided for out of the profits of the subsidiary available for distribution;
- upon the acquisition of such shares and for so long as the shares are held by the subsidiary, the subsidiary shall not exercise any voting rights in respect of the shares and any purported exercise of those rights shall be void;
- the prescribed manner in which shares are to be treated in the group’s and the subsidiary’s financial statements (which restricts profits available for distribution) must be followed.
Acquisition of Shares in Holding Company II
A subsidiary’s profits available for distribution for the purpose of acquisition above, do not include the profits attributable to any shares in the subsidiary held by the subsidiary’s holding company, in so far as they are profits for the period before the date on or from which the shares were acquired by the holding company.
Where a company has acquired shares in its holding company, then if an insolvent winding up commences within 6 months, the court on the application of the liquidator, creditor, employee or contributory may declare that the directors shall be jointly and severally liable to pay to the company, the total amount paid by the company for the shares.
Where it appears to the court that any person against whom a declaration is sought, believed on reasonable grounds that the acquisition was in the best interests of the company, the court may relieve him either on whole or in part, from personal liability on such terms as it may think fit.
References and Sources
Companies Act 2014 S.102 -116 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Ch. 16 Conroy
Law of Companies 4th Ed. (2016) Ch.10 Courtney
Keane on Company Law 5th Ed. (2016) Hutchinson
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Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
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Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
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UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law