Redeemable Shares of Stock - Explained
What are Redeemable Shares?
Written by Jason Gordon
Updated at April 15th, 2022
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Table of Contents
What are Redeemable Shares of Stock?What are the Types of Redeemable Shares of Stock?Academic Research on Redeemable SharesWhat are Redeemable Shares of Stock?
Redeemable Shares are shares of stock that can be repurchased by the issuing company on or after a predetermined date or following a specific event. These shares have a built-in call option that enables the issuer to exchange the shares for cash at a predetermined point in future.
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What are the Types of Redeemable Shares of Stock?
Two types of redeemable shares are usually issued by companies.
- Maturity Date Shares - A share may carry a maturity date when the company is obligated to redeem the shares. The company pays the shareholders the original value of the shares (the par value) on that fixed date and the share then ceases to exist.
- Call Date Shares - Another type of redeemable shares may carry a call date. The company is allowed to exchange those shares for cash on or after the call date. However, they are not obligated to do so.
The companies may issue mandatorily redeemable shares to its employees as sort of a compensation kicker. The company issues such shares to its employees with a call option. If an employee holding the share decides to leave the firm, the employer exercises the call option and buys back the shares from the leaving employee. The employee is obligated to sell their share in the exchange of cash.
The companies often exercise this right if the share is a restricted share or the company is a closely-held company with a small number of shares in the market. In 2009, the Securities and Exchange Commission and later the Financial Accounting Standards Board updated and clarified the rules for accounting the mandatorily redeemable shares on the book.
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