What are Mandatorily Redeemable Shares

Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event. Essentially, they are shares with a built-in "call" option that will be exercised by the issuer of the shares at a pre-determined point in the future. Mandatorily redeemable shares are often issued by employers as a sort of compensation kicker to employees. In this context, the employer usually requires the employees to redeem these shares for cash or bonds and attaches the redemption requirement to certain prescribed events or timelines.

BREAKING DOWN Mandatorily Redeemable Shares

One example of a situation where an employer would issue mandatorily redeemable shares would be in the case of an employee quitting the firm. The employer would exercise its "call" option on these shares forcing the exiting employee to sell back his or her company shares. An employer might do this in a situation where the shares are restricted and greatly in the money, or if it is a closely-held company with relatively few shares in float.

In the past, there have been irregularities and ambiguities surrounding how the issuer of mandatorily redeemable shares should account for them on their books. In 2009, the Securities and Exchange Commission and, subsequently, the Financial Accounting Standards Board issued updates that provide a more stringent framework for accounting for mandatorily redeemable shares.<