Treasury shares were introduced in 2003 to enable certain companies to hold shares bought back from shareholders “in treasury”.
Chapter 6 Part 18 of the Companies Act 2006 sets out the up to date provisions relating to treasury shares, although it should be noted that private limited companies have only been able to hold shares in treasury since 30th April 2013. Since this date, the restriction on the number of shares a company can hold in treasury has been abolished (although of course, a company must have some of its shares in issue to shareholders).
What are Treasury Shares?
Treasury shares are shares a company holds in itself which have been bought back by the company from a shareholder and paid for out of distributable profits. Treasury shares cannot be “allotted” or just transferred from a shareholder, they must be the product of a buy-back pursuant to the share buy-back provisions of the Companies Act.
What are the advantages of having treasury shares?
There are several advantages to a company holding shares in Treasury these include:
- Flexibility – shares can be bought back by the company and held in treasury for future use. If it is found the company later has no use for them, they can be cancelled
- Buying-back shares to sell on later to shareholders to enhance a company’s “earnings per share” and avoid some costs associated with a subsequent allotment
- Their use to satisfy options under an employee share scheme
- Restore distributable profits paid out by the Company in the course of the buy-back – if the shares bought back are cancelled the distributable profits cannot be replenished.
What is the procedure to put shares into treasury?
The first thing that a company will need to do is to check the company’s articles of association to ensure they do not prohibit the holding of treasury shares – it would be a “specific exclusion” in the articles as it is not normally prohibited. The articles also need to be checked to ensure that they do not state that any shares bought back must be cancelled. If the company’s articles provide these restrictions/prohibitions, then the company must decide whether it still wants to proceed with treasury shares and if so, the company’s articles will need to be amended accordingly.
The shares must be held as a result of a buy-back and have been bought back out of distributable profits of the company (not as a result of a fresh issue of shares, capital or cash).
When completing the form SH03 in connection with the buy-back, the option to hold the shares in treasury must be noted before the form is submitted to the Revenue and then Companies House.
Once the shares are “in Treasury”, the transfer should be noted in the company’s statutory registers in the normal way and the register of members will show that the shares are held by the company – they will automatically be re-designated as “treasury shares” but will retain the same nominal value.
It should be noted that treasury shares become non-voting whilst held by the Company in treasury, and they do not count for voting purposes on a PSC declaration. The shares also hold no dividend or distribution rights whilst they are held in treasury. The shares will however show as “treasury shares” on the company’s confirmation statement as they do still exist. Once the shares are re-issued by way of transfer, they will carry the rights of the share class that they are reissued as at that point in time.
If you have any questions about treasury shares and whether they would be of use in your company or any other corporate governance aspect please do not hesitate to contact Michelle Lamberth at michelle.lamberth@herrington-carmichael.com or on 0118 977 4045
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
