Treasury shares are issued shares that a company has repurchased from its shareholders and chosen to retain ‘in treasury’, instead of immediately cancelling them after the share buyback procedure. There are several reasons why companies hold treasury shares, which we discuss in this post. We also explain the procedure and administrative requirements involved with company shares held in treasury.
Holding shares in treasury
Before 1 December 2003, UK companies were obliged to cancel any shares that they bought back from their shareholders. However, the Companies Act 2006 (part 18, chapter 6) now allows both private and public companies to make a purchase of their own shares and subsequently hold them ‘in treasury’ to sell or transfer at a later date.
Subject to the company’s articles of association, treasury shares can be held indefinitely and cancelled at any time at the company’s discretion. They are still classed as issued share capital and retain the same nominal value, but the rights attached to the shares are suspended because companies cannot hold rights in themselves.
This means that, whilst a company is entered in its own register of members as the holder of the treasury shares, it cannot exercise any rights in respect of those shares, such as:
- the right to attend and vote at general meetings
- the right to dividends or other distributions or assets
- rights of pre-emption
The treasury shares (and their associated rights) are essentially put on hold and kept ‘in storage’ until such time that the company decides to sell or transfer them, but the company’s share capital remains exactly the same. If they are later sold or transferred, the rights attached to those shares are reinstated.
To place shares into treasury, the company must have purchased them from the selling shareholder(s) using the buyback procedure and, typically, paid for the shares in full using post-tax distributable reserves (profits) rather than capital.
However, under certain circumstances, private limited companies (as opposed to PLCs) can finance small buybacks of shares out of capital using the ‘de minimis’ exemption. To qualify for this exemption, the aggregate consideration for any buyback transaction in a financial year must not exceed the lower of £15,000 or the cash equivalent of 5% of the aggregate nominal value of the company’s share capital.
Advantages of treasury shares
Holding shares in treasury offers the following advantages to certain companies:
- flexibility to retain repurchased shares for future use or cancel them at a later date if they are not required
- ability to raise cash quickly and easily by selling treasury shares to new investors without the need to carry out an allotment of shares – the latter of which can be more costly and time-consuming
- satisfying employee share option plans, share warrants, and convertible securities without issuing new shares and diluting existing shareholdings
- enabling the company to actively manage its weighted average cost of capital (WACC)
- replenishing distributable profits used to finance a share buyback, which is not possible when repurchased shares are cancelled
- avoiding the additional administrative requirements of cancelling the shares
The use of treasury shares is limited to very particular objectives, so they are more commonly found in public limited companies and large private firms. The average UK private limited company does not typically hold them, but they can be beneficial under certain circumstances.
How to place shares into treasury
If you are considering carrying out a share buyback and subsequently holding some or all of the repurchased shares in treasury, there are several steps you need to follow.
Step 1. Check the articles and shareholders’ agreement
The very first thing you must do is refer to the company’s articles of association and any private shareholders’ agreement that exists.
The Model articles do not prohibit share buybacks or treasury shares, nor do they stipulate that repurchased shares must be cancelled, but some companies include specific exclusions or restrictions in amended or bespoke articles and/or within a shareholders’ agreement.
If any such restrictions or prohibitions are contained within your company’s articles of association, the shareholders will have to pass a special resolution to amend the articles accordingly.
Where no restrictions exist, the company is free to carry out a share buyback and place shares into treasury for future use.
Step 2. Carry out a share buyback
The next step is to carry out a purchase of own shares using the share buyback procedure, as per the requirements of the Companies Act (part 18, chapter 4). This process typically involves:
- Confirming that the shares the company wishes to buy back are fully paid up
- Reviewing the company’s accounts to ensure that it has sufficient distributable reserves to repurchase the specified shares from the selling shareholders
- Holding a board meeting to establish the terms of the buyback agreement between the company and selling shareholders, including the quantity and class of shares being sold, the purchase price, and the proposed transaction date
- Passing a board resolution approving the proposed share buyback
- Passing an ordinary resolution or written resolution of the shareholders to authorise the terms of the buyback and approve the transaction
- Paying the selling shareholder(s) in full and then holding the shares in treasury
- Completing and filing Companies House form SH03 – Return of purchase of own shares
To complete form SH03, you must enter the following information:
- Section 1 – Company registration number and company name in full
- Section 2 – Only required if cancelling any repurchased shares
- Section 3 – Details of shares purchased to place into treasury
- Section 4 – Stamp Duty liability, if any, or declaration that no Stamp Duty is payable
- Section 5 – Dated signature of the director or other authorising person
The company will be required to calculate, report, and pay Stamp Duty of 0.5% if the share buyback transaction is more than £1,000. If Stamp Duty is due, the company must make the required payment and then email the completed form SH03 to HMRC to be stamped.
HMRC will then send a letter to confirm that the Stamp Duty has been paid. Once you have received this stamping confirmation letter, you must submit a copy of it to Companies House along with form SH03.
Step 3. Update the company’s statutory register of members
When the repurchased shares are in treasury, you will need to update the company’s statutory register of members to reflect the changes. You should do this in the same way as a normal transfer of shares, but the company will be listed as the holder of the treasury shares.
Since the rights attached to the shares are suspended whilst they remain in treasury, the shares should not be taken into account for voting purposes in the company’s PSC register.
You must also report the change to Companies House when you file your next annual confirmation statement, just as you would with a normal transfer of shares. The public register will then be updated accordingly.
Selling or transferring treasury shares
Subject to the company’s articles and shareholders’ agreement, you can sell or transfer treasury shares at any time. However, you can only transfer (as opposed to sell) shares held in treasury for the purposes of an employee share scheme.
In either case, directors are not usually required to obtain prior approval from the company’s members before doing so.
Subject to the company’s articles or shareholders’ agreement, pre-emption rights may apply upon the sale or transfer of shares held in treasury. In such instances, the existing members will have to waive their pre-emption rights or authorise a disapplication of pre-emption rights in the articles.
Unlike a new issue of shares, you can only sell treasury shares for cash consideration, but they can be transferred without consideration if they are being used for an employee share scheme.
As soon as the shares have been sold or transferred to the new shareholder(s), the suspended rights attached to those shares are immediately reinstated and can be exercised by the new shareholder(s).
The company must update the register of members accordingly, issue share certificates to the new shareholders, and complete and deliver Companies House form SH04 ‘Notify a sale or transfer of treasury shares’ within 28 days.
Any proceeds from the sale of treasury shares can be treated as realised profits, up to the amount that the company paid for those shares during the buyback procedure. This sum can then be credited to the company’s distributable reserves, but any excess profit made from the sale must be treated as capital and credited to the company’s share premium account.
How to cancel treasury shares
A company can cancel some or all of its treasury shares at any time, subject to the provisions set out in its articles of association or shareholders’ agreement. By doing so, the company’s issued share capital will be reduced by the nominal value of the cancelled treasury shares.
To cancel shares held in treasury, you must complete and file Companies House form SH05 ‘Notice of cancellation of treasury shares’ within 28 days.
Thanks for reading
Treasury shares provide greater flexibility and convenience to many UK companies by enabling them to manage certain share transactions in a more efficient and cost-effective manner.
Having the option to repurchase shares and hold them in treasury for an indefinite period of time is particularly beneficial to companies that frequently buy back their own shares to sell to new investors or transfer to an employee share scheme.
As with any share transaction, professional advice from an accountant is always recommended to ensure the best outcome for your limited company and shareholders.
If you have any questions about this post, please leave a comment below.