News
Redeemable Shares
04-Jul-2017
By Dr. Rafiq Tawfiq Al Dweik- ASCA (Jordan) BOD Members
AMMAN- Article (68 /b bis) of the Jordanian Companies Law No. (22) for the year 1997 as amended titled (types of shareholding options) provided that: The Memorandum of Association of a Private Shareholding Company may stipulate its right to issue redeemable shares either upon the Company or shareholder’s request or upon the availability of certain conditions.
However, the said law did not include any clarifications, controls or provisions related to the issuance of this type of shares and the method of dealing with them in terms of accounting and legal methods of disposition of this type of shares. Also no any by-law or regulations were issued until the date pursuant to the said law to support the provisions of the law to address the deficiency referred to.
Following are some lights on this type of stock and some of the provisions related to it according to the practices applied in other countries and what is stated in the literature regarding the redeemable shares:
• Redeemable shares includes a purchase option that allows the issuing company to dispose of these shares exclusively on or after the agreed upon call date (call option). These shares are called back by cancellation and payment of their current value in addition to the accrued dividends.
• Call Date of shares for payment or exchange with another type of shares:
(1) The call date of shares for payment or replacement is not necessarily the date of amortizing of the shares, as this may be done at a later date as the date mentioned is the first date for taking a possible action in this regard, and the issuer company in this case can determine the date of payment or replacement at any later date, or not to set any date at all.
(2) In some cases, the date of amortization or replacement to be decided by the Board of Directors of the issuing company.
(3) If the prospectus contains a maturity date, the issuing company in this case shall be bound by the amortization or payment process.
• The prospectus for the issue of redeemable shares should include:
(1) The Call (Date of payment) and related options.
(2) The party that has the right to determine the Call Date is it the right of the shareholder or the right of the issuing company?
(3) The price of the payment is it at par value or at the present value of the shares as at the Call Date?
(4) The percentage of dividends and the method and timing of payment, including the right of the issuing company to accumulate dividends in case of lack of liquidity for distribution.
(5) Options available to the shareholder either to exchange redeemable shares by ordinary shares or to any other type of issued shares and / or liquidating their value at the Call Date.
(6) Preferential treatment enjoyed by the redeemable shares in terms of receiving periodic dividends and of receiving of the shares’ value in the event of liquidation of the company or any other related matters.
• The Company issues Preferred redeemable shares for a specified period of time. These shares are often issued when the company has plans for growth or expansion; in this case, capital increase is used rather than leveraged to avoid the consequences of more debt.
• The shareholders may choose the right time to redeem the value of the redeemable shares at the end of the agreed period (Call Date). The shareholder has the option, either to exchange of shares with ordinary shares, or to receive the shares’ value in cash. In this case, the shareholder will redeem the par value of the redeemable share in addition to the shares’ dividends.
• The Call Option of the redeemable shares may be of the right of the issuing company. Therefore, the issuing company exercises this right if the borrowing interest rates are reduced and become less than the proportion of the dividends of the agreed upon redeemable shares. In this case, the company will replace the shares with debt.
• Redeemable shares are usually given preferential treatment over other categories of shares. These include preferred payments on ordinary shares. These repayments include periodic dividend payments, as well as repayments made when the company is eventually liquidated. Creditors' rights are first repaid and then after the more are used to repay redeemable preferred shares. In most cases, redeemable preferred shares are preferred to other categories of preferred shares as well.
• In some cases, the Call Option depends on the occurrence of a certain event, such as the death of the shareholder, in such case, if the option of amortizing option is the right of the issuer, it is likely to exercise this right if it has sufficient liquidity and the issuer wants to reduce the number of shares of capital. As the redeemable shares are amortized, the company will shrinks the value of the dividends without affecting the normal return on the ordinary shares.
Redeemable shares represent a hybrid model for the following reasons:
• Although this type of shares has the priority to be paid back, but it does not have a voting power in the General Assembly Meetings, as it is often considers redeemable shares a hybrid form of sources of funds that falls between the shares and debt.
• This type of shares is issued for a fixed period of time just like debt, and holders of these shares are paid dividends instead of interest.
• The redeemable shareholders have no rights in the assets of the company nor the right to interfere in the management of the company.
Changes in shares prices:
• The prices of both ordinary shares and redeemable preferred shares remain volatile, mainly due to the change in the company's profitability position.
• Retrospective redeemable shares have the right to receive specific dividends, while ordinary shares will receive all remaining dividends and returns after payment of the rights of creditors and redeemable shareholders.
• The redeemable shareholders must carefully assess the potential differences in the price before they can exchange their redeemable shares with ordinary shares.
Reasons for issuing redeemable shares
(1) Not to increase the ceiling of leveraged transactions.
(2) Flexibility in determining the percentage of distributable dividends.
(3) Finding a type of shares that do not have voting power.
(4) Make room to issue shares to administrators, employees or family members.
Articles of the Jordanian Companies Law relating to redeemable shares
1- Article (68 bis) of the Jordanian Companies Law No. (22) for the year 1997 as amended provides as follows:
Share Types and Shareholding Options
(A) Subject to any provisions in this part, the Company may, according to its Memorandum of Association, issue various types and categories of shares which differ in their terms of nominal value, voting force and method of profit and loss distribution among shareholders. These shares also differ in respect of their rights and priorities upon liquidation and their aptitude to be converted into other types of shares besides their related rights, advantages, priorities and other restrictions, provided that these be implied or summarized in the shares’ certificates if found.
(B) The Memorandum of Association of a Private Shareholding Company may stipulate its right to issue redeemable shares either upon the Company or shareholder’s request or upon the availability of certain conditions.
(C) Any type or category of the Company's shares may have priority over other categories and types regarding profit distribution. Furthermore, these shares may be entitled to a lump sum or a specified percentage of the profit that are subject to conditions and periods set by the Memorandum of Association. Moreover, any of these types and categories may have priority in receiving profits due to them, for any year during which no profit was distributed, in addition to profits due in that fiscal year.
(D) The Memorandum of Association of a Private Shareholding Company may provide for the possibility of converting or replacing any share type or category issued by it into any other type or category upon the request of the Company or a shareholder or upon the fulfillment of a certain condition according to rates and method set in the Company Memorandum of Association.
(E) A Private Shareholding Company may buy any shares it had previously issued. It may also re-issue or sell same for the price deemed proper by the Board of Directors or cancel them and accordingly decrease its capital on the basis set out in its Memorandum of Association and this Part. Company owned shares shall not be taken into consideration for the purpose of ascertaining a quorum for attendance at the General Assembly’s meeting and for taking decisions therein, provided that the Securities Law and regulations and instructions issued pursuant thereto are observed.
(F) Subject to the Company's Memorandum of Association, the Securities Law and regulations and instructions issued in pursuance, a Private Shareholding Company may issue share options that permit their holders to buy or request the Company to issue shares. The options’ conditions, date of implementation and implementation prices of same shall be determined in the Company Memorandum of Association or pursuant to a decision by the Board of Directors provided that it is authorized to do so by the extraordinary General Assembly.
2) Article 86 (bis) of the same law provides that:
Gross Losses
“If a Private Shareholding Company is exposed to gross loss so that it becomes unable to meet its obligations towards its creditors, the Board of Directors shall invite the Company extraordinary General Assembly to a meeting to issue a decision, either to liquidate the Company, or issue new shares, or any other decision which would guarantee its ability to fulfill its obligations. If the General Assembly is unable to take a definite decision in this respect during two consecutive meetings, the Controller shall give the Company a one-month grace period to take the required decision. In the event the Company fails to do so, it shall be referred to the Court for compulsory liquidation in accordance with the provisions of this Law”.
(3) Article (89/a) of the same law provides that:
Application of other Provisions “ Provisions related to Public Shareholding Companies stipulated in this Law shall apply to a Private Shareholding Company, unless an express provision is provided for in this Part, or Articles or Memorandum of Association. ”
(4) Article 186 of the same law stipulates that:
Distribution of Profit and Compulsory Reserve
(1) The Public Shareholding Company may not distribute any dividends to its shareholders except from its profits, and after settling the rotated losses of the previous years. The Company shall deduct an amount equivalent to 10% of its annual net profit for the compulsory reserve account. No profits shall be distributed to shareholders before the deduction of such an amount. These deductions may not cease before the total amount accumulated in the account of the statutory reserve has become equal to one quarter of the Company subscribed capital. However, the Company may, with the approval of the General Assembly continue to deduct this annual ratio until this reserve equals the subscribed capital of the Company in full.
(2) A Public Shareholding Company may not distribute its compulsory reserve amongst its shareholders. However, the Company may use the said reserve to secure the minimum limit of profits as required by the agreement of Companies having concessions, for any year, where their profits at the said year cannot secure that minimum limit. The Company's Board of Directors must return to that reserve the amounts which have already been deducted there from whenever the profits of the Company allow that in the following years. The Council of Ministers may, shall the need arise, partially use the compulsory reserve of the Company, as the case may be, to cover its payments for the purpose of settling surplus profits realized for the government that are in excess of the profit stipulated in accordance with the concession agreement in which it is a party provided that such reserve is returned in accordance with the provisions of paragraph (a) of this Article.
Accounting standards that address redeemable shares
(1) IFRS did not address the accounting treatment of this type of shares.
(2) The Accounting Standards Codification ASC 480 issued by the Federal Accounting Standard Board (FASB) addresses the accounting treatment of this type of shares under the following principles:
(A) If the terms of issuing redeemable shares include any condition that may ultimately result in the payment of such shares, the shares in the financial statements shall be classified as liabilities rather than equity instruments.
(B) If the terms of the issuing redeemable shares may ultimately result in non-payment of the value of these shares, the shares are classified in the financial statements as temporary equity instruments and are classified as equity in a separate item.