Redeemable Stock Shares Definition
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 an built-in call option that enables the issuer to exchange the shares for cash at a predetermined point in future.
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.
References for Redeemable Shares of Stock
Academic Research on Redeemable Shares
Classes of shares and share redemption in Italian and UK company law: the peculiar case of the redeemable shares, Vitali, M. L. (2006). Electron J Comp Law, 10, 1-39. This article contains a description and comparison of the UK and Italian approaches to equity finance with particular reference to the respective regimes of these nations concerning the issue of classes of shares. It attempts to verify if UK rules on the classes of shares and share redemption are flexible as they appear to be or if their flexibility is limited.
Spain: Redeemable shares under Spanish law, de Carlos, L., & Ramirez, C. (1998). International Financial Law Review, 17(12), 62. This paper presents the recent developments in Spanish company law that would favor access by Spanish companies to new financial mechanisms. One of the critical developments is the possibility of Spanish companies to issue redeemable shares as an instrument by which they can secure additional funds for a limited time.
Redeemable shares issued by hedge funds: a wrong turn in Cayman?, Harris, D. (2016). Law and Financial Markets Review, 10(3), 150-155. This article examines the recent decision of the Cayman Islands Court of Appeal in Herald Fund SPC v Primeo Fund, which considers whether specific claims for redemption proceeds rank pari passu with claims of ordinary unsecured creditors or are subordinate to them. It argues that the decision represents a wrong turn in an area of Cayman Islands company law which is essential to the hedge fund market.
SUGGESTIONS ON ECONOMIC COOPERATION WITH DEVELOPING COUNTRIES: Redeemable Shares as a Principal Step toward the Facilitation of Private …, Nakayama, S., & Della Croce, G. (1965). SUGGERIMENTI SULLA COOPERAZIONE ECONOMICA CON I PAESI IN VIA DI SVILUPPO. Il Politico, 65-74. This paper considers it a matter of serious significance that IBRD is presently studying the idea of an arbitration system for disputes on international investments and that DAC is blueprinting a global investment insurance system. The paper holds the view that more serious ideas should be explored quickly alongside the systems as mentioned above.
Accounting for redeemable preferred stock: Unresolved issues, Nair, R. D., Rittenberg, L. E., & Weygandt, J. J. (1990). Accounting Horizons, 4(2), 33. This article explains that the FASB has completed work on a significant portion of the conceptual framework and has defined the elements of financial statements. It states that the concepts in this framework can be used to discuss major income statement issues that accompany redeemable preference stock like the accounting for dividends and early redemption costs.
The end of redeemable preference shares, Neilson, T. (1999). J. Austl. Tax’n, 2, 149. This paper discusses the issues that emanate from the standard form of the issue carrying rights only to a return of monies subscribed and to a fixed rate of dividends. It also explains that a redeemable preference share would usually carry a fixed cumulative dividend that corresponds broadly to a right to receive interest on a loan.
Redeemable corporate securities, Jones, P. W. (1931). S. Cal. L. Rev., 5, 83. This article explains that it has become a norm to insert some form of redemption clause in most corporate bonds and that much effort has been expended in devising, enlarging and refining the language that appears in successive redemption provisions. This effort has been successful in adjusting the rights of the interested parties without disputes that lead to litigation.
Credit enhancement through financial engineering: Freeport McMoRan’s gold-denominated depositary shares, Chidambaran, N. K., Fernando, C. S., & Spindt, P. A. (2001). Journal of Financial Economics, 60(2-3), 487-528. This study examines how Freeport McMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capability in Indonesia. It explains that the pricing of these securities reflected their enhanced credit quality making it rise from the positive correlation between the value of the firm and the value of the securities.
Variation in attributes of redeemable preferred stock: Implications for accounting standards, Kimmel, P., & Warfield, T. D. (1993). Accounting Horizons, 7(2), 30. This research utilizes the relation between firm leverage and systematic risk to present empirical evidence on the economic substance of hybrid security known as a redeemable preferred stock (RPFD). The results suggest that RPFD does not possess a debt-like effect on systematic risk and that the market perception of hybrid security is conditioned on attributes like voting rights.
Redeemable preference shares [Corporate taxation.], Hadassin, M. (2002). Tax Specialist, 5(4), 158. This paper discusses redeemable preference shares which are hybrid securities since they possess characteristics belonging to both debt and equity. The rights and entitlements that accompany these shares are not generic and can be defined by the members passing a special resolution of the company or by just amending the constitution to include the rights and obligations that are associated with these shares.
Valuation and Accounting for Redeemable Corporate Capital: An Islamic Perspective, Butt, S. A., & Hassan, A. (2011). Journal of Islamic Economics, Banking and Finance, 7(4), 65-78. This article investigates the contemporary valuation and accounting issues with reference to redeemable capital and recommends that valuation on a historical basis. It also suggests an accounting framework which ensures that any significant gain attributed to a redemption of equity shares is treated in the books in a manner that results in compliance with all relevant laws and sound accounting practices.