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How Does a Company Redeem Redeemable Shares in New Zealand?

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The Companies Act 1993 (the Act) governs how shares are issued by companies in New Zealand, including if a company can redeem shares at a later date.  In addition to the Act, companies can opt to have a constitution and a shareholders agreement. These documents work alongside the default rules established in the Act and provide the flexibility to make modifications, such as issuing various classes of shares and establishing company-specific rules for these actions. This article will outline how a company can redeem redeemable shares. 

What Types of Shares Can a Company Issue?

When a company issues shares, it can decide whether to issue different classes of shares, in accordance with the Act and the company’s constitution. These include shares which are:

  • redeemable;
  • confer preferential rights to distributions of capital or income;
  • confer special, limited or conditional voting rights; or
  • do not have voting rights attached to them.

Typically, the company’s constitution will provide further information or restrictions on the various types of shares it can issue and any associated rules.

What Are Redeemable Shares?

A redeemable share is a share that the issuing company retains the right to buy back at a later date. In order to be able to issue redeemable shares, the company’s constitution must allow the company to issue preference shares. A company can “redeem” shares:

  • at the option of the company;
  • at the option of the shareholder; or
  • on a date that is specified in the constitution or the terms of the issue of the share (for example, if a specific event occurs).

It is agreed upfront between the company and the intended holder of the shares if the shares are to be redeemable. This involves consideration, in the form of payment of compensation, to the shareholder when the company repurchases the shares. 

The company’s constitution should also outline the terms of any share redemption. This must include the amount the company will need to pay the shareholder to redeem their shares. The price can either be:

  • specified;
  • calculated using a formula contained in the constitution; or
  • valued by a suitably qualified third party at the time of redemption.

When deciding to exercise an option to redeem shares, a company will need to consider if the redemption is in the best interests of the company. It is also essential for them to consider if the consideration or price is fair and reasonable to the company. Part of the consideration for these two points is ensuring the company will meet the solvency test once the shares have been redeemed.

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Key Takeaways

Redeemable shares are shares that the share-issuing company can purchase back for a price. Redeemable shares can be issued if the company’s constitution provides for this. The company’s constitution, alongside the Act, will outline how the company can redeem these.

If you have any questions about redeemable shares in New Zealand, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

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Rebecca Smith

Rebecca Smith

Associate | View profile

Rebecca is an Associate in LegalVision’s Corporate and Commercial teams and also assists the New Zealand team with Leasing work. She can assist in a number of commercial transactions, including business sales and purchases, and provide advice around business structuring and asset protection.

Qualifications: Bachelor of Laws, Bachelor of Commerce, University of Canterbury.

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