Conditions for the Redemption of Shares - Case Study Example

Corporate Law a) Conditions for redemption of shares at premium Sections 684 to 689 of the Companies Act 2006 (c.46 deal with various issues relating to redemption of shares including the premium payable on such redemptions. The directors of Mirza Plc intend to redeem 10000 redeemable shares of £ 1 face value for a total sum of £ 15000. That is to say the redemption of shares is at a premium of £ 5000. It is pertinent to note that these shares were initially issued at a premium of £ 2500. The other plan of the directors of Mirza Plc is that the redemption of such shares shall be financed by a fresh issue of 5000 shares of £1 each at a premium of £ 0.30 each share. The total value (including premium) of the new issue will be £ 6500. The relevant legal position in this regard is as under: The directors of a limited company are able to settle terms of redemptions of shares only when they are empowered by the Articles of association of the company to do so. Otherwise the terms prescribed in the articles are to be followed. Accordingly the process of redemption to be followed by Mirza Plc will depend upon the terms either provided in its Articles of association or settled by the resolution of the board only when articles expressly empower directors to do so. The terms of redemption of shares must be laid down before the issuance of such redeemable shares. In other words Mirza Plc can redeem shares only at a premium when such term existed before issuance of its redeemable shares. Under no circumstances Mirza Plc can settle fresh terms of redemption of shares after issuance of such shares. That is why the law provides that the terms, conditions, and manners of redemption must be stated in the statement of capital required to be filed with registrar. It may be noted that only an ordinary resolution is sufficient to alter the articles on the matters relating to redemption of shares. Only fully paid up shares can be redeemed as are in the case of Mirza Plc. The terms of redemption stated in statement of capital at the time of issuance may also permit Mirza Plc to discharge the obligation of payment at a date later than the date of redemption. As per provision of the Companies Act, 2006, Mirza Plc may redeem the shares out of undistributed profit. However,it may finance the redemption out of a fresh issue. It appears that Mirza Plc has decided to use both the options. As the required redemption amount is £ 15000 (including premium) and new issue will fetch only £ 6500 (including premium), it is clear that Mirza Plc will also be using accumulated profits to pay part of redemption liability. One of the conditions prescribed by the Companies Act, 2006 is that premium on redemption can be paid only when shares were originally issued at premium. Mirza Plc fulfils this condition as redeemable shares were issued at a premium of £ 2500. The law requires that redemption must be made out of undistributed profits, but proceeds of fresh issue made for redemption can be used to make payment of premium on redemption up to lower of the following: a) premium received at issuance of shares being redeemed (i.e. £ 2500 in case of Mirza Plc), and b) current amount of share premium account including premium on fresh issue (i.e. $11500 in case of Mirza Plc.) That means fresh issue proceeds can be used only up to £ 2500 for repayment of redemption premium and the rest will be paid out of undistributed profits. With regard to redemption of principal amount, the same will be partly paid out of principal amount received on fresh issue and the balance from accumulated profits of Mirza Plc. Thus redemption will be financed as under: Principal amount of £10000 £5000 will be paid from fresh issue proceeds (as premium of £ 1500 from fresh issue is added to total premium account for payment of redemption premium up to £ 2500 as stated above). The balance principal amount of £5000 will be paid out of accumulated profits. Premium of £5000 payable on redemption £ 2500 shall be paid out of share premium account as stated above, and the balance of £ 2500 from undistributed profits. b) Writing off entire premium paid on redemption of shares In order to explain the matter of writing off the premium to be paid by Mirza Plc on redemption of shares, attention is drawn to the provisions of sub-section (5) of section 687 of Companies Act, 20062. The relevant provision is as under: “The amount of the company’s share premium account is reduced by a sum corresponding (or the sum in aggregate corresponding) to the amount of any payment made under sub section (4).” Sub section (4) of section 6873 draws the mechanism of determining the amount to be paid as premium out of share premium account. As per this sub section the premium payable at redemption is the lower of amount of premium received at the time of issuance of shares being redeemed and the amount standing to the premium account (including premium on fresh issue financing the redemption) at the time of redemption. Accordingly whatever amount of premium that is calculated as per sub section 4 of section 687 is required to be reduced from company’s share premium account. As stated in earlier part of this write up, Mirza Plc can use share premium account (inclusive of premium on fresh issue) only up to £ 2500. This is so because premium received of £2500 on issuance of shares being redeemed is lower than the balance in share premium account (inclusive of premium received on fresh issue). Therefore entire premium of £5000 paid on redemption of shares cannot be written of against share premium account. Only premium paid up to £2500 calculated as per section 687(4) can be written off to the share premium account. The share premium account has already a balance of £10000 and adding to this the premium of £1500 received on fresh issue the share premium account will splurge up to £ 11500. Writing off £ 2500 out of total premium paid on redemption will leave a balance of £ 9000 in the share premium account. The balance premium of £ 2500 paid out of undistributed profits shall be charged to Profit and Loss account. c) Redenomination of some shares from sterling to euros Companies Act, 2006 permits the companies to redenominate their share capital. Section 6224 of the Companies Act, 2006 describes the term ‘redenominate’ as to ‘convert shares from having a fixed nominal value in one currency to another currency’. The companies are free to decide to redenominate their share capital or part of capital in any currency. Mirza Plc. needs to consider timings and plan to redenominate as a resolution is required to be passed in general body meeting and that may be annual general meeting or extraordinary general meeting. Therefore Mirza Plc. can redenominate some of its shares capital from sterling to euro following the under mentioned procedure: As stated above a resolution of general body is required to be passed stating the appropriate conversion rate of exchange on a specified date or average rate of a range of dates. Such specified date or range of dates must be within 28 days before the date of resolution. Mirza Plc may resolve to comply with some prior conditions before undertaking such redenomination of share capital from sterling to euro. Resolution must also determine a date on which redenomination will become effective and that may be the date of resolution or any other date but not later than 28 days of the date of resolution. Section 623 of the Companies Act, 2006 has provided a three stage formula for such conversion from sterling to any other currency. Following the three steps method of conversion prescribed under section 623 of the companies act, 2006, the Mirza Plc ‘would be required to adopt a top down method of conversion, by converting the total nominal amount of the authorized share capital (both issued and unissued) in each class to the nearest euro cent and then dividing by the number of authorized shares in order to arrive at the nominal euro amount of each individual share.’(Bank of England Publications)5. Therefore Mirza Plc. will first convert required authorized share capital into nearest euro cents at the conversion exchange rate passed in resolution and then divide the total such euro value with number of shares to find out nominal euro value of each share. Naturally the nominal value of each share would not result into exact euro and needed to be rounding off upward or downward. Accordingly there may be reduction of capital in downward adjustments, and in such case the resultant figure will be adjusted to ‘redenomination reserve’ in accordance with the provisions of section 628 of the Companies Act, 2006. It is natural that differences of upward adjustment will also be adjusted into company’s reserves. Redenomination will not affect the rights and or obligations of the shareholders, particularly the entitlements to dividend, voting rights, and liability to pay unpaid amount on shares. Within 30 days of effecting redenomination of capital, Mirza Plc. is required to give a notice to Registrar along with statement of capital as per the provisions of section 625 of the Companies Act, 2006. In case redenomination results into reduction of share capital, a special resolution is required to be passed with in three months of resolution of redenomination and with in 15 days of such special resolution the Mirza Plc is again required to give a notice of such special resolution along with a statement of capital to the registrar. References Read More