A redemption right means that a company or its shareholders can choose to redeem the shares for cash or a new issue of shares. Article 57A of CAP.113 (the “Law”) allows for the “buyback” of shares only for public companies. However, pursuant to Article 57 of the Law, a private company may issue redeemable preference shares, which may then be repaid by the company without violating the underlying principle of Cypriot company law, which prohibits private companies from buying back their own shares.
Cyprus private limited liability companies commonly use redeemable preference shares to fund private equity and other corporate transactions. Where a company’s articles of association provide for the issuance and allotment of redeemable preferred shares, these shares must be issued as shares that carry the right to be redeemed. In other words, previously issued ordinary shares cannot be converted into redeemable preference shares. If the articles of association do not allow for the issuance of redeemable preference shares, they must be amended to allow for it. Furthermore, the method, time frame, and process for redeeming shares must be specified in a company’s articles of incorporation. Article 57 of the Law also specifies the procedure for issuing redeemable preference shares by a private company and should not be overlooked, as it contains certain redemption restrictions.
The redeemable preference shares must be issued from the company’s authorized but unissued share capital. As a result, redemption has no effect on the company’s authorized share capital. The amount of the company’s issued share capital is reduced by the nominal value of the redeemed shares, whereas the amount of the company’s authorised share capital is unaffected by the redemption. The shares may only be redeemed with profits from the company that would otherwise be used to pay dividends or with the proceeds from the issuance of new shares for the purpose of redemption. Finally, such shares may not be redeemed unless they are paid in full.
The legal system in Cyprus also allows for more flexibility in terms of redemption, so redemption can take place in the following ways:
- At the discretion of the issuing company;
- at the discretion of the shareholder;
- or upon the occurrence of a specific event.
Redeemable preference shares can be issued at either a nominal or a premium price. They can rank pari passu with all other existing shares, but they can also carry a variety of rights depending on the company’s articles, including but not limited to:
- The redeemable preference share holder’s voting rights;
- The rights to dividends and dividend priorities;
- The redemption period and/or conditions;
- The return of capital.
Tax implications
Finally, when a company considers issuing redeemable preference shares, it must assess any adverse tax considerations, both for the issuing company and the holders of such shares.