What is “redemption” with respect to preferred stock? What happens if a company can redeem?
Redemption is a repurchase of shares by a company. Preferred stock terms typically provide for the mandatory redemption of the preferred stock by the company if requested by the investors (investors generally are not permitted to call for redemption until five years after the initial issuance of the preferred stock). The price per share at which the company must redeem the preferred stock is ordinarily equal to the price at which the preferred stock was issued plus a small guaranteed rate of return (e.g., accrued dividends). In practice, redemption rights are not often used; however, they do provide a form of exit for an investor (in the absence of an acquisition or IPO) and some possible leverage for the investors over the company in the future. Due to absence of funds to repurchase the shares in compliance with statutory restrictions on redemption, it is unlikely that a company will be legally permitted to redeem.
