Calls . . . 

are a company's contractual rights to require a shareholder to surrender shares of company stock in return for payment of an agreed-upon sum of money. Calls are usually contingent upon the happening of some future event, such as the passage of time or the accomplishment of some goal by the company.

Management might exercise a call and redeem an investor's stock if another investor was willing to pay a higher price for shares than the call price. Even without a ready investor, management might call an investor's stock if it believed the market value of the company's stock had risen to more than the call price. In each case, redeeming stock at a call price that is below market value can increase the value of the remaining shareholders' stock.

The cost to the company is the cash required to pay the investor for his shares. In deciding to exercise a call, management must weigh the potential benefit of redeeming shares at below market prices against the company's need for the cash used to exercise the call and its ability to replace that cash when needed.

Calls are usually optional but can, by express agreement, be made mandatory. A mandatory call, however, is nothing more than a contract to redeem stock at a future date. Calls which become effective after a set period of time are used sometimes to force a convertible preferred stock investor to chose, after the time has elapsed, between converting his preferred stock into common stock or accepting the call payment in redemption of his stock interest. When used in this way, the call mechanism sets a time limit on the preferences granted in the preferred stock.

As with a put (which entitles a shareholder to force a company to redeem shares), an obligation to exercise a call should be conditioned on the company's ability to meet the corporate law requirements of the company's state of incorporation. These laws often restrict the types of funds a company can legally use to redeem shares. See: Cash Flow, Convertible Preferred Stock, Convertible Securities, Exits, Puts.