A right of redemption means that a company or its shareholders can decide to redeem the shares in exchange for cash or a fresh issue of shares. "Buy back" of shares is strictly permitted only for public companies in accordance to article 57A of CAP.113 (the "Law"). However, the Law provides, under article 57, the power to a private company to issue redeemable preference shares which they may subsequently be redeemed by the company without contravening the underlying principle of Cyprus company law, which prevents private companies from buying back their own shares.
Redeemable Preference Shares
Redeemable preference shares are frequently used by Cyprus private limited liability companies to finance private equity and other corporate transactions. Provided that the articles of a company allow for the issue and allotments of redeemable preference shares, these shares must be issued as shares that carry the right to be redeemed. That is, already issued ordinary shares cannot be converted into redeemable preference shares. In the event that the articles of association do not provide for the issuance of redeemable preference shares, they will need to be amended in order to allow it. In addition the articles of a company shall specify the method, time frame and process to be followed for the share redemption. Article 57 of the Law also regulates the procedure of issuing redeemable preference shares by a private company and should not be neglected, since it includes certain limitations in regards to the redemption.
The redeemable preference shares must be issued and from the authorised, yet unissued share capital of the company. Therefore, redemption does not reduce the authorized share capital of the company. The amount of the company's issued share capital is diminished by the nominal value of the shares redeemed whereas the company's authorised share capital is unaffected by the redemption. The shares shall be redeemed only by the profits of the company that would otherwise be available for dividend payment or from the product of a new issue of shares made for the purpose of the redemption. Finally such shares shall not be redeemed unless they are fully paid.
The Cyprus legal framework also extends the versatility to the terms of redemption and as such, redemption may occur:
- At the option of the issuing company;
- At the option of the shareholder;
- On the occurrence of a particular event.
Redeemable preference shares may either be issued at a nominal value or at a premium value. They can rank pari passu with all other existing shares however at the same time they can also carry a variety of rights depending on the articles of the company including but not limited to:
- The voting rights of the redeemable preference share holder;
- The rights to dividends and priorities on dividends;
- The timing and/or conditions of redemption;
- The repayment of capital.
Finally when a company is considering to issue redeemable preference shares, care must be taken to assess any adverse tax considerations, both in relation to the issuing company as well as the holders of such shares.
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