Corporate and Business Law (Global) · Capital maintenance and dividend law

Share Buybacks and Redemption of Shares Explained

Updated 11 October 2026 · Fact-checked

Redemption is when a company buys back shares that were issued as redeemable. Purchase of own shares is a buyback of shares not issued as redeemable. Both are paid for from distributable profits or a fresh share issue made for the purpose. A private company may use capital only for any shortfall, with the right resolution and procedure.

Understand Share Buybacks and Redemption

A company normally cannot buy its own shares. That would cut its capital, which is the safety fund for creditors. So the law allows it only under strict rules. There are two routes: redemption and purchase of own shares.

Redeemable shares are shares issued on terms that the company or the holder can make the company buy them back later. The company must have been authorised by its articles to issue them. A company cannot issue redeemable shares if there would then be no non-redeemable shares left in issue. The terms and dates of redemption are fixed by the articles or by the directors, if the articles allow.

A purchase of own shares (buyback) is different. The shares were not issued as redeemable. The company agrees with the shareholder to buy them. There are two types. A market purchase is made on a recognised investment exchange, such as a stock exchange, and the shares are traded there. An off-market purchase is any other purchase, usually a private contract with a shareholder. Private companies use off-market purchases most often.

The shares are normally cancelled on redemption or purchase, so the issued share capital falls. A limited exception lets a company hold bought-back shares as treasury shares, but only if they are qualifying shares (shares listed or traded on a qualifying market) bought out of distributable profits. Treasury shares can be resold or cancelled later.

Funding is the exam focus. The sources open to any company are distributable profits or the proceeds of a new issue of shares made for the purpose. These are alternatives, and neither ranks above the other. A private company may also pay out of capital, but only for any shortfall left after available distributable profits and fresh-issue proceeds, and only if the special procedure is followed. The permissible capital payment is the purchase price less available distributable profits and less the proceeds of any fresh issue made for the purpose. A public company can never use capital. Shares must be fully paid and paid for on purchase, not later. Any premium on redemption or purchase must come from distributable profits, subject to a limited exception for premiums funded by an earlier share issue premium.

Key formulas to remember

Redemption: when allowed: Articles authorise + redeemable terms at issue + other non-redeemable shares remain in issue; Shares must be fully paid and paid for on redemption.
Funding sources (any company): Distributable profits OR proceeds of a fresh issue made to fund it; These are alternatives, not a ranking. Premium on redemption or purchase normally comes from distributable profits.
Payment out of capital: Permissible capital payment = purchase price − available distributable profits − proceeds of any fresh issue made for the purpose; Private companies only, and only for the shortfall. Public companies cannot do this.
Off-market purchase approval: Contract approved by special resolution (s.694) before it is made (or contract conditional on approval); The shareholder whose shares are being bought cannot use their votes if the resolution would pass only because of them.
Market purchase approval: Ordinary resolution (s.701) authorising the purchase, with a maximum number of shares, price limits and an expiry date; The authority must specify an expiry date no later than 18 months after the resolution is passed.
Payment out of capital approval: Directors' statement of solvency + auditor's report + special resolution passed on or within a week after the date of the statement; Creditors and members can object to court within 5 weeks after the resolution. The payment is made 5 to 7 weeks after the resolution.
Treasury shares: Qualifying shares (shares listed or traded on a recognised/qualifying market) bought out of distributable profits; They can be sold, transferred for employee share schemes, or cancelled.

How to solve Share Buybacks and Redemption questions

Use this order for any scenario about a company buying back or redeeming its own shares.

1Identify the company type: public or private. This decides whether capital can be used.
2Identify the route. Were the shares issued as redeemable (redemption) or not (purchase of own shares)?
3If it is a purchase, decide if it is a market purchase on a recognised exchange or an off-market purchase.
4Check the funding source: distributable profits or the proceeds of a fresh issue made for the purpose. These are alternatives. Private companies may use capital only for any shortfall.
5Check the shares are fully paid and are paid for at the time of redemption or purchase.
6Identify the approval needed. Redemption on the agreed terms needs no separate purchase resolution (the articles must authorise redeemable shares). An off-market purchase contract needs a special resolution. A market purchase needs an ordinary resolution. A payment out of capital needs a special resolution and the statutory procedure.
7Check the extra conditions, such as the solvency statement, auditor's report and creditor objection rights.
8State the outcome: lawful or unlawful, then say what happens to the shares (cancelled or held as treasury shares).

Quickest way: Four-question filter for objective tests

When to use it: Use this for Section A and Section B objective questions where you have about a minute to answer.

Is the company public? If yes and the option mentions capital, eliminate it.
Redeemable shares or not? Redeemable means no separate purchase resolution on the agreed terms (a payment out of capital still needs a special resolution). Not redeemable means a purchase that needs the right resolution.
Market or off-market? Market purchase needs an ordinary resolution as general authority. Off-market needs the contract approved in advance by special resolution.
Look for the trap words: 'ordinary resolution' for an off-market contract (it is special), 'partly paid' (not allowed), 'all shares redeemable' (not allowed).

Common mistakes in Share Buybacks and Redemption

Saying a public company can pay for a buyback out of capital.
Students remember the capital option and forget it is limited to private companies.
Fix: Link 'capital' to 'private only'. Public companies use distributable profits or a fresh share issue.
Using the wrong resolution for a buyback.
Students remember one resolution type and apply it to every purchase.
Fix: An off-market purchase contract needs a special resolution (s.694). A market purchase needs an ordinary resolution (s.701). A payment out of capital also needs a special resolution. Redemption on the agreed terms needs no separate purchase resolution.
Treating redemption and purchase of own shares as the same thing.
Both end with the company taking back shares.
Fix: Ask whether the shares were issued as redeemable. If yes, it is redemption. If not, it is a purchase.
Allowing a company to redeem all its shares or buy back partly paid shares.
Students forget the protective conditions.
Fix: Remember there must still be non-redeemable shares in issue, and shares must be fully paid and paid for on purchase.
Ignoring the shareholder's vote on an off-market purchase.
Students focus on the type of resolution and miss who can vote.
Fix: The member whose shares are being bought cannot vote if the resolution would not pass without their votes.
Assuming bought-back shares are always cancelled.
Textbooks stress cancellation as the normal result.
Fix: Remember the treasury share exception: qualifying shares bought out of distributable profits.

Worked examples

Example 1

Maple Ltd is a private company. It has distributable profits of $20,000. A shareholder wants Maple Ltd to buy back her shares, which cost $50,000 and are fully paid. The shares were not issued as redeemable. The company wants to pay the full $50,000 and makes no fresh share issue for the purpose. Advise on how this can lawfully be done.

Show the solution

Maple Ltd is private, so capital may be used for any shortfall.
The shares were not issued as redeemable, so this is a purchase of own shares. It is a private contract, so it is an off-market purchase.
Funding: available distributable profits of $20,000 are applied first. No fresh issue is made, so there are no issue proceeds to deduct.
Permissible capital payment = $50,000 − $20,000 − $0 = $30,000. It is allowed because the company is private and the profits are insufficient.
For the capital payment the directors must make a solvency statement, the auditor must report on it, and the members must pass a special resolution on or within a week after the date of the statement. Creditors and members can object to the court within 5 weeks after the resolution, and the payment is made 5 to 7 weeks after the resolution.
The off-market contract must also be approved by special resolution before it is made (or be conditional on approval). The selling shareholder cannot vote if the resolution would not pass without her votes.
The shares are fully paid and are paid for on purchase, and they will be cancelled.

Answer: Lawful. Use $20,000 of distributable profits and a $30,000 permissible capital payment, with a directors' solvency statement, auditor's report and special resolution for the capital payment, and a special resolution approving the off-market contract.

Example 2

Delta plc is a public company listed on a stock exchange. It has issued ordinary shares that are not redeemable. It wants to buy back some of them through the exchange, paying from a new issue of shares made for that purpose. Is this allowed, and may it hold the shares?

Show the solution

Delta plc is public, so capital cannot be used. The question uses a fresh issue instead, which is a permitted source.
The shares are not redeemable, so this is a purchase of own shares.
They are bought on a recognised exchange, so it is a market purchase.
A market purchase needs an ordinary resolution giving authority. It must state the maximum number of shares, the price limits and an expiry date no later than 18 months after the resolution is passed.
Treasury status needs qualifying shares bought out of distributable profits. Delta's shares are qualifying shares because they are listed.
Here the funding is a fresh issue, not distributable profits, so the shares cannot be held in treasury.
The shares must be cancelled.

Answer: The purchase is lawful with an ordinary resolution authorising the market purchase. The shares must be cancelled because they were not bought out of distributable profits, so treasury status is not available.

Exam tips

Start every answer by naming the company type. Public or private decides most of the outcomes.
In objective tests, scan options for 'public company' with 'capital'. This is nearly always wrong.
In written answers, name the type of purchase (market or off-market) and the resolution required before you discuss funding.
List the capital payment steps in order: solvency statement, auditor's report, special resolution, creditor objection period.
Only mention treasury shares when the scenario involves qualifying shares (listed or traded on a qualifying market) bought out of distributable profits.

Practice questions from Capital maintenance and dividend law

Share Buybacks and Redemption in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Share Buybacks and Redemption: frequently asked questions

What is the difference between redemption and purchase of own shares?

Redemption applies to shares issued on redeemable terms. A purchase of own shares applies to shares that were not issued as redeemable. The funding rules are similar, but the approvals differ. Redemption on the agreed terms needs no separate purchase resolution, while a purchase needs a special resolution (off-market) or an ordinary resolution (market). A payment out of capital needs a special resolution in either case.

What is the difference between an off-market and a market purchase?

A market purchase is made on a recognised investment exchange. An off-market purchase is any other purchase, typically a private deal with a shareholder. An off-market contract must be approved by special resolution, while a market purchase needs an ordinary resolution giving authority with an expiry date.

Can a company redeem shares out of capital?

Only a private company can, and only for the shortfall left after available distributable profits and the proceeds of any fresh issue made for the purpose. It needs a solvency statement, an auditor's report and a special resolution. Creditors and members may object to the court.

Can a company buy back its shares if they are not fully paid?

No. The shares must be fully paid, and the company must pay for them when it purchases them. Deferred payment is not allowed.

Are bought-back shares always cancelled?

Usually, yes. The exception is treasury shares, which a company can hold if they are qualifying shares bought out of distributable profits. They may later be resold or cancelled.