Redeemable preference shares

What are redeemable preference shares?

Redeemable preference shares are a specialised share class combining equity and debt features, offering preferential rights to dividends and priority during liquidation, with the distinctive characteristic that they can be bought back (redeemed) by the issuing company at predetermined terms as set out in the company's articles of association and relevant share documentation.

Why choose redeemable preference shares?

Companies and investors select redeemable preference shares over other preference share types for three primary reasons:

• Built-in Exit Mechanism - unlike non-redeemable preference shares, they provide companies with the legal right to buy back the shares, eliminating the need to find third-party buyers.

• Capital Flexibility - they serve as temporary capital that can be removed from the balance sheet when no longer needed, whereas standard preference shares remain as permanent capital.

• Enhanced Investor Returns - the redemption premium offers investors returns above their initial investment, creating an attractive middle ground between fixed-income investments and equity risk.

Uses of redeemable preference shares

Redeemable preference shares provide versatile structuring options to address specific business scenarios:

• Private Equity Transactions - creates tiered capital structures with defined exit pathways

• Joint Ventures - establishes clear mechanisms for partner separation at predetermined milestones

• Family Businesses - income streams for non-active members while preserving control

• Management Buyouts - for structuring phased ownership transitions

• Growth Capital - injecting temporary funding without permanent ownership dilution

Redemption premium - a key driver for investors

The redemption premium is often the most significant attraction for investors in redeemable preference shares. This premium represents the amount paid above the original share value at redemption and typically functions as follows:

While there is no standard formula, investments can be structured with substantial premiums. The redemption premium can be structured as a fixed amount, a percentage of the original investment, or through complex formulas tied to company performance metrics.

Premium size is a critical negotiation point, with investors typically seeking higher premiums for longer redemption periods or higher-risk ventures.

Redemption terms

Redemption can occur at a fixed time, on a particular event, at the company's option, or at the shareholder's option This structure directly affects the effective cost of capital for the issuing company and the potential returns for investors. Some arrangements include step-up premiums that increase over time to incentivise earlier redemption.

Other considerations include :-

• Trigger Events - define specific circumstances that activate redemption rights, such as change of control, achievement of revenue thresholds, or completion of funding rounds. These triggers can be designed to align shareholder exits with company milestones, ensuring capital structure adapts to business development stages.

• Notice Requirements - formal notice periods (typically 14-30 days) before redemption provide operational certainty for both parties. Longer notice periods benefit companies by providing time to arrange funding, while shorter periods favor investors by limiting the window for adverse developments.

• Partial Redemption Provisions - allow companies to redeem shares in tranches rather than all at once, helping manage cash flow impact. Clear rules for determining which shares are redeemed first (often pro-rata across shareholders) prevent selective treatment of investors.

Practical aspects of establishing redeemable preference shares

• Articles of association must explicitly permit redeemable shares and establish their characteristics

• Proper documentation of terms and conditions in subscription agreements

• Compliance with Companies Act 2006 requirements regarding redemption funding

• Planning for redemption funding well in advance of maturity

• Regular review of redemption obligations against financial projections

How We Can Help

Our experienced corporate lawyers deliver comprehensive support for redeemable preference share structures, including:

• Designing bespoke share structures aligned with commercial objectives

• Drafting robust documentation that withstands legal scrutiny

• Negotiating balanced terms between company and investor interests

• Ensuring compliance with legal and regulatory requirements