Redeemable shares as a business financing tool
It is clear that companies lacking the necessary liquidity are looking for sources of external financing. The banking system has always chosen to attract (and lend) companies that have little or no funding needed – especially in times of recession.
Alternatively, a solution for companies is their capital enhancement either by the shareholders or by third parties – non-shareholders. In this case, however, it is reasonable for the candidates to participate in to consider: (a) the return on their investment; (b) to ensure their ability to withdraw from the investment; and (c) to ensure that the benefit which, at least initially, they were looking forward to, can be reaped.
The basic function of redeemable shares
Businesses that face liquidity or solvency problems or that simply seek to finance the business plans they have drawn up may have recourse to the issue of redeemable shares. These shares may be issued by the company either as common or as privileged with (or without) voting rights. The important thing, in this case, is that these shares are required to be redeemed by the issuing company either through a statement from the latter or from the shareholder to participate. Regardless of the obligation, the redemption is likely to be the (appropriate) strategic choice of the majority shareholder.
The treatment of redeemable shares by the new law
The new law on Sociétés Anonymes includes a set of arrangements for redeemable shares. The most important of them is the requirement of the takeover statement: when the relevant terms of the statutes are met and, at the same time, there are amounts available for the redemption available for distribution. This latter condition proves to be very important, since otherwise (lack of available funds) the relevant statement of the shareholder’s acquisition does NOT take effect. The provision of guarantees or other collateral to the holder of redeemable shares is worthless: Collateral, as an ancillary contract, can only work when funds are available for redemption. Otherwise, it proves to be irrelevant.
Another important provision is that the General Meeting with an increased quorum and majority may decide to convert some of the existing shares into redeemable-always respecting the principle of equal treatment (pari passu) of the shareholders.
The capitalization of redeemable shares is also an arrow in the quotient of the company so as to make it attractive to increase its share capital in the effort to implement its business goals (with the point of note, of course, that the acquisition of redeemable shares presupposes the existence of corresponding available funds to the company).
Further, leveraging the ability of the law to convert shares into redeemable may also be a means of return to the shareholders of a part of their share in the share capital.
The potential (optimal and/or multilevel) utilization of the particular institution is (and must be) related to the data and needs of the business. But, like any other business decision, it is (and indeed even more) dependent on the strategy and interests of majority shareholders.
The latter and their consultants are responsible for optimal planning and its effective implementation.
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 31st, 2019).