Treasury Shares – An Opportunity to be Treasured

Under section 658 of the Companies Act 2006 (‘CA 2006’), there is a general rule against companies acquiring and owning their own shares.

However, there are exceptions to this rule, and provided that certain procedures are followed and conditions are met, a company may purchase its own shares. A company might purchase its own shares to facilitate a shareholder exiting that company.

Under section 724 of the CA 2006, where a company purchases its own shares in accordance with Chapter 4 of Part 18 of the CA 2006 and the purchase is made out of distributable profits, it may hold those shares as ‘treasury shares’ (this effectively means that the company owns its own shares and must even be entered in its own register of members as the shareholder holding those shares); however, a company cannot exercise any rights attached to treasury shares (such as voting rights and rights to receive dividends).

Upon a company purchasing its own shares in accordance with Chapter 4 of Part 18 of the CA 2006 and out of distributable profits, it may cancel the shares (meaning that they cease to exist and the amount of the company’s issued share capital will decrease by the nominal value of the shares cancelled) or, as mentioned above, it can hold the shares as treasury shares.

Why would a company opt to hold shares it has bought back as treasury shares rather than cancel them?

There are multiple reasons why a company might opt to hold shares it has bought back as treasury shares, including:

Under section 727(1) of the CA 2006, a company can sell treasury shares it holds without having to complete all the procedures for an issue and allotment of shares (a company’s board of directors does not need to be given authority by an ordinary resolution of the company’s shareholders under Section 551 of the CA 2006 to sell treasury shares, and Form SH01 does not need to be filed at Companies House following a sale of treasury shares); however, whilst a company has no pre-emption rights in relation to an issue and allotment of shares based on treasury shares it holds, other shareholders still have pre-emption rights in relation to any treasury shares which are sold, meaning that the treasury shares to be sold have to be offered to existing shareholders pro-rata to their existing shareholding (unless the pre-emption rights have been disapplied by the company’s articles of association or by a Special Resolution of the shareholders).

• When treasury shares are sold, the proceeds of sale up to the original purchase cost of the shares are treated as distributable profits, so a company can restore its distributable profits which were used to purchase the shares in the first place (if shares which are bought back are cancelled, the potential to restore distributable profits in this way will be lost)
• A company can use treasury shares to fulfil employee share options under an employee share scheme (under such a scheme, employees of a company may have been granted options to purchase shares in the company they work for on a given date in the future), rather than establishing an employee benefit trust – the advantages of this include the company not having to expend money on trustee fees
• Stamp duty is not payable on a sale of treasury shares by a company (such a sale is treated like an allotment and issue of new shares in this sense)
• A company would not have to file Form SH06 at Companies House (however, Form SH03 must be filed at Companies House when shares are bought back by a company, whether the shares which are bought back are cancelled or held as treasury shares)

Clarkslegal’s Corporate and Commercial team can advise on share buybacks by companies (whether the intention is that the shares which are bought back are to be cancelled or are to be held by the company as treasury shares).

Please get in touch with our corporate lawyers if you would like additional details about treasury shares.