Treasury shares may not be a pot of gold at the end of a rainbow, but they do provide companies with a variety of options and benefits if managed correctly.
Anisha Malik and Michelle O’Flaherty from JTC’s London office analyse these instruments:
What are treasury shares?
Treasury shares are shares held by the Company, which have been bought from a shareholder and are not immediately cancelled upon delivery back to the Company.
They were introduced in 2003 although private limited companies have only been able to hold shares in treasury since 30th April 2013. The latest relative provisions relating can be found in Part 18 of the Companies Act 2006.
A company that holds its shares in treasury can sell those shares back into the market or cancel them.
Treasury shares cannot be allotted or just transferred from a shareholder and can only be classed as treasury shares if they have been brought from an existing shareholder, in compliance with the provisions of the Companies Act.
It is notable the buy-back of shares is paid for out of distributable profits and not out of capital.
Why would a company hold treasury shares?
A company may wish to hold treasury shares for future distributions/subscriptions (including employee share schemes). This has the potential to enhance the Company’s earnings per share and may avoid associated costs where a subsequent allotment may have been required.
The Company may also be able to restore distributable profits during a buy-back of shares. However, if these shares are cancelled, the distributable profits will not be replenished. FA03/S195(8) provides that a sale of shares out of treasury is to be treated as an issue of new shares.
If the Company decides that it no longer requires treasury shares, these can be cancelled at any time. Cancelling will reduce the Company’s share capital by the nominal value of the shares cancelled.
Are there restrictions with holding treasury shares?
Some companies may be prohibited from holding treasury shares or holding and then cancelling through specific exclusion.
Therefore, it is always best to ensure that the constitutional documentation and provisions of the Companies Act 2006 have been reviewed and complied with throughout the buy-back process. If certain restrictions do apply, the Company is still able to amend the relevant provisions to enable the Company to hold treasury shares.
Treasury shares should always be distinguished as such in the Company’s records, to HMRC and to Companies House. Shares held in treasury carry no voting rights, dividend or distribution rights and should not be included when considering PSC positions and declarations.
A company cannot hold all voting shares in treasury as there must be at least one shareholder who is able to vote.
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.
When treasury shares are sold, the proceeds should be treated as realised profits of the Company up to the amount originally paid by the Company for those shares. This enables the Company to restore the original reduction in realised profits to the position before the shares were bought back by the Company.
How can JTC help?
With a focus on professionalism, integrity, and independence, JTC provides a broad range of global corporate clients with a tailored outsourced company secretarial service.
JTC’s global presence and deep understanding provides a wide range of high quality corporate secretarial services relevant and customised to your specific requirements.
If you would like to find out more about how JTC’s full suite of company secretarial services can help your business, or if you require any specific requirements tailored to suit your needs, please contact Michelle O’Flaherty.
