What Are Treasury Shares?

4 years ago

Content:

Treasury shares are basically the previously outstanding shares repurchased from shareholders. The issuing company buys the stock back from the stockholders and holds it. Treasury shares are usually recorded on the company’s balance sheet in the shareholder equity section.

In the Companies Act 2006, the chapter 6 part 18 states the updated and detailed provisions associated with holding treasury shares. Treasury stock actually came into being in the year 2003. The main purpose of this stock is to enable companies to hold shares by repurchasing the shares from existing stockholders. However, even though it was introduced in 2003, the private limited companies in the UK have been able to hold treasury shares since 2013.

What are the advantages of holding treasury stock?

There are many advantages of holding treasury shares or holding shares in treasury. These are discussed as follows:

Treasury shares bought back from shareholders and paid for out of distributed profits. The company that repurchases the share and holds it in treasury can use it for the future. Therefore, it gives enough flexibility in terms of use. Not only that, if the company later finds that the shares are not going to come of use, then they can be cancelled too.

Once you repurchase a share and hold it in treasury, you can also sell that share to shareholders. It will enhance your company’s earnings per share. In addition to that, you will be able to eliminate the costs that were otherwise emerge for subsequent allotment.
The distributed profits will not be replenished in case the shares are cancelled.

What are the main uses of treasury stock?

There are several reasons for repurchasing or reacquiring outstanding or issued shares from shareholders or investors. The main reasons are discussed below.

For reselling

Treasury shares can be thought of like reserved stock. This reserved stock can be put to use in the future for raising funds or other business investments. Not only that, but you can also utilize a treasury stock for paying for an acquisition or investment. You can also reissue the share to your existing shareholders.

For controlling interest

When you are buying back your outstanding shares and holding it in treasury, it means the number of your outstanding shares is reduced. As a result, the value of the interest of your remaining shareholders gets increased. Repurchasing outstanding stocks can also help you to avoid hostile takeovers.

For improving financial ratios

The most prominent after effect of repurchasing stocks is the improvement of financial ratios. It can potentially improve your company’s market performance. The main reasons behind that is because it causes an increase in the ROA and ROE (Return on Assets and Return on Equity).

Undervaluation

Your company may face such a situation when the market performance is not up to the mark. It may result in your company’s stock to be underpriced. However, if you buy back your outstanding shares, you will be able to enhance the share price. So ultimately, the remaining shareholders will be benefited.

Retiring of shares

You can no longer sell a treasury share if it is retired. So, in that situation, the treasury shares are taken out of the market circulation. As a result, your share count will be reduced permanently. Therefore, the remaining shares now represent a larger percentage of ownership. It also includes profits and dividends.

How do I put shares in the treasury?

First step is to check your Articles of Association document to make sure you are not prohibited from holding treasury shares. The Articles of association should also be checked to ensure there are no restrictions (e.g. you need to cancel bought back shares). The shares must be repurchased out of distributed profits. In other words, it cannot be bought as a result of a fresh issue of shares, cash, or capital. You will need to complete a form known as SH03. You will need to complete this and submit the form to Companies House in the UK.

How to repurchase shares?

It means you buy shares back. The main purpose of buying back shares is to reduce the number of outstanding shares circulating in the market. Investors and company owners are benefited from this because it increases the ownership of the remaining shareholders. The two most common ways to repurchase stocks are discussed as follows.

Tender offer

Your company may offer to buy back shares at a specific price you are willing to pay. This price is usually above market price (or at a premium). The offer will also include a valid duration. Shareholders can tender their shares.

Direct repurchase or open market

It implies the direct buying of shares in the open market. A share price will usually increase if a company announces to repurchase stocks. Then the company can simply purchase that share just like any other investors does on the market.

Conclusion

Every company has the right to issue shares. The shares issued by a company are usually known as outstanding shares. Outstanding shares are the total existing shares of the company. This shares outstanding can be of two types, i.e. restricted and publicly traded.

Now treasury stock is the part of outstanding shares that are repurchased by the company. You should keep in mind that treasury shares are non-voting.

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