The mechanism of Redemption of Shares under the Companies Law, Cap. 113

The ability of a Cyprus company to issue redeemable shares is determined in its Articles of Association that constitutes the instrument that sets out the regulations with regards to the operation of the Company. More specifically, relying on template Articles of Association included in Table A of the First Schedule of the Companies Law (Cap 113), and in particular to regulation 3 thereof, “subject to the provisions of Section 57 of the Law, any preference shares may, with the sanction of an ordinary resolution, be issued on the terms that they are or at the option of the Company are liable, to be redeemed on such the terms, and in such manner [in terms of, among others, time, notice period, price and tranches] as may be determined by special resolution of the Company before the issue of such shares”. According to the said mechanism, a person may temporarily become a shareholder of a Cyprus company while his/her share shall be redeemable either at the option of the same or the company.

Retrieving from the aforesaid regulation included in Table A of the First Schedule of the Companies Law (Cap 113), the issue of redeemable shares is made by ordinary resolution while it is the Company -at a General Meeting- that determines through a special resolution (passed before the issue of such redeemable shares) the manner of redemption. In light of the provisions of the regulation in question, whether the holder of the shares or the Company can proceed with the redemption is determined by an ordinary resolution of the General Meeting while the particular manner of redemption (among others, whether, in the case the shares are redeemable at the option of the Company, the General Meeting or the Board of Directors will have the right to redeem the said shares), is determined by a special resolution of the General Meeting. However, in the event that the Company fails to determine the manner of redemption, the remaining provisions of the Company’s Articles of Association must be taken into consideration so as to find out whether the Board of Directors is authorized to exercise such power; if not, the Board of Directors may -in the circumstances- have to bring the matter to the attention of the General Meeting so as for the latter to resolve, by way of special resolution, the manner of redemption.

Moreover, in so far as the status of redeemable preference shares is concerned, it is worth noting that, as a general principle, preference shares usually carry some preferential rights in relation to other classes of shares, particularly, in relation to ordinary shares. Besides, neither the Law nor the common law attach a rigid, uniformly applicable meaning to ‘ordinary’, ‘preference’ or other description of shares. In other words, while preference shares are usually associated with certain preferential rights, in the absence of specifically determined rights in the terms of issue thereof, it follows that the redeemable preference shares are issued on the same terms as the existing shares. Besides, as noted by the Supreme Court of the Republic of Cyprus in Lavinia Investments Ltd ν. Republic (1998) 3 C.L.R. 827 ‘it is assumed that all shares, unless there is evidence to the contrary, grant the same rights and impose the same responsibilities’; this coincides with the presumption of equality of shares. On that basis, we may assume that in the absence of specifically determined rights in the terms of issue of the redeemable preference shares, these are differentiated on that these are issued on the term that they are subject to redemption. That said, it seems that in all other aspects the redeemable preference shares carry the same rights as the existing (at the time of the issue of the first redeemable shares) shares.

Lastly, as regards the substantial nature of redeemable preference shares in terms of their classification as either equity or liability for accounting purposes pursuant to the IFRS, it is stressed that, in general, preference shares redeemable only at the option of their holder can be categorized as equity while preference shares redeemable at the option of the Company are regarded as liabilities or loans, especially in the case that these seem that are or were used as a means for financing; however, such classification always depends on the particularities of each case which must be examined under the IFRS.

All in all, the specific procedure for the redemption of the respective preference shares to be followed in each particular case is largely determined by the manner of redemption as this is set forth in the relevant instrument passed in accordance to the relevant provisions of the Company’s Articles of Association, while of considerable importance is whether the shares in question are redeemable at the option of their holder and/or the Company. Therefore, it becomes apparent that both at the stage of the issuance of such shares as well as at the stage of the redemption thereof, it is of particular importance to respectfully follow the relevant provisions of the respective company’s Articles of Association, which must be properly interpreted in order for any misconceptions to be avoided.