What are redeemable shares?
Where used in the context of shares or other securities issued by a company, “redeemable” essentially means “issued on terms that allow or require the company to buy it back”. Redeemable shares are therefore a separate class of shares issued by a company that are intended to be redeemed by the company, at the option of the company itself or of the shareholder. Redeemable shares are normally redeemed for some value, usually cash. Share redemptions provide a company with an alternative way of returning capital to shareholders other than carrying out a share buyback.
Authority to issue redeemable shares
The Myanmar Companies Law 2017 (MCL) treats redeemable shares as a form of preference shares. There is no express requirement in the MCL for redeemable shares to carry preferential rights on any other issues (such as dividends, voting, etc.) other than being subject to redemption. However, in most cases redeemable shares will also carry other preferential rights.
A company can issue preference shares, including redeemable preference shares, if terms defining the rights attaching to those shares are set out in the company’s constitution or have been approved by a special resolution of company’s members (MCL sections 73, 74 and 112(a)(vi)). As redeemable shares constitute a separate class of shares (from ordinary shares), the constitution must also authorize the creation of classes of shares. Once the creation of a class of redeemable shares (or other preference shares) and the terms attaching to that class of shares have been approved – either in the constitution or by special resolution – the company’s directors can be given authority to issue shares on those terms without further recourse to the members. The Model Constitution for a private company limited by shares published by the Directorate of Investment and Company Administration (DICA) gives this authority to directors in sections 9 and 10.
Section 112 of the MCL allows companies to convert ordinary shares into preference shares, and vice versa (subject to shareholder approval). However, it is not clear whether this extends to redeemable preference shares. In some other common law jurisdictions, redeemable shares are expressly required to be issued as redeemable shares from the outset. We suggest that it is safest to follow this approach in Myanmar.
The MCL does not expressly state that a company’s constitution can prohibit the issue of preference shares, including redeemable shares. However, given that the issue and terms of preference shares can be authorized by specifying these in the constitution, it should be the case that the constitution can also prohibit the issue of redeemable and other preference shares. The constitution must therefore be checked before a company proposes to issue redeemable shares.
Redemption of redeemable shares
Section 74(b) of the MCL provides that redeemable preference shares may be redeemed: (i) at a fixed time or on the happening of a particular event; (ii) at the company’s option; or (iii) at the shareholder’s option. Companies have some flexibility to, for example, permit redemption of the shares in different tranches at different times; or to provide for a fixed redemption price or a formula for determining the price.
However, under section 74(c) of the MCL companies may only redeem redeemable preference shares: (i) if the shares are fully paid up; (ii) out of profits or out of the proceeds of a new issue of shares made for the purpose of the redemption; and (iii) if the directors determine on reasonable grounds that the company would pass the solvency test following the redemption.
The “solvency test” is defined in section 1(c)(xxxix) of the MCL as meaning that:
(A) the company is able to pay its debts as they become due in the normal course of business; and
(B) the company’s assets exceed its liabilities,
in each case as determined in accordance with the accounting standards applicable to such companies or prescribed from time to time.
Note that, where a company intends to finance a redemption from the proceeds of an issue of new shares, the issue must be made specifically for the purpose of funding the redemption.
The MCL does not expressly state that the redemption price must be paid in cash. It therefore seems possible that the payment could be made in kind, including transfer of a non-cash asset or set-off against a liability. To avoid any confusion or dispute over the redemption price, it is advisable for companies to clearly specify the form and amount, or manner of calculating, the redemption price in the terms of the redeemable shares approved prior to allotment.
Steps post-redemption
When shares are redeemed, they are automatically treated as cancelled (MCL section 74(e)). The company’s issued share capital should be reduced by the nominal value of the redeemed shares.
Form C-3 – change to share capital or register of members, notifying the cancellation of the redeemed shares and the associated changes in shareholder details, must be filed with DICA via the MyCO online company registry system within 21 days after a redemption of shares.