What Are Mandatorily Redeemable Shares?

Mandatorily redeemable shares are shares of stock owned by an individual or entity, which are required to be reclaimed by the issuer 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.

key takeaways

  • Mandatorily redeemable shares are a type of preferred stock shares that have to be reclaimed by the issuer at a pre-determined time or upon a specific event.
  • They are often issued by employers as a perk to employees.

Understanding Mandatorily Redeemable Shares

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.

One example of a such a situation involving mandatorily redeemable shares would be in the case of an employee quitting a firm. The employer would exercise its "call" option on these shares, forcing the exiting employee to sell back their company stock. 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 (that is, available for trading).

Like most callable equities, mandatorily redeemable shares are a type of preferred stock.

Special Considerations for Mandatorily Redeemable Shares

In the past, there have been irregularities and ambiguities surrounding how the issuer of mandatorily redeemable shares should account for them on their books. For example, in 2009, a company named Certified Diabetic Services engaged in a lengthy correspondence with the Securities and Exchange Commission (SEC) over whether its preferred stock counted as a mandatorily redeemable security or was more akin to debt.

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. In December 2018, the Accounting Standards Board of Canada amended its regulations, clarifying how and when shares have to reclassified as liabilities on corporate balance sheets.