Treasury Shares

An addition to the ACCA Paper F4 syllabus – both English and Global – with effect from June 2012 is the topic of Treasury Shares.

by Mike Little, OpenTuition F4 tutor

For many years within English Law it was illegal for a company to hold shares in itself or in its holding company. As a natural pre-cursor it was illegal for a company to purchase its own shares.

But then, towards the end of the last century, the law was changed and companies were allowed to purchase their own shares and cancel them.
There is a lot of commercial sense in this basic concept. If the board of directors have confidence in the company’s prospects, and if the company has available funds, what better target for their investment than the company’s own shares? Subsequent cancellation would reduce the number of shares in issue and potentially strengthen earnings per share.

A basic rule established from the start of this allowable activity was that the acquisition should be financed from distributable profits. The reasoning behind this particular requirement is to protect the interests of the company’s creditors. The practicalities of the rule are that an amount equal to the nominal value of the purchased shares should be transferred to a non-distributable element of equity out of “profits which would otherwise have been available for distribution” – more commonly referred to as “distributable profits”.

The effect of this is to maintain the “buffer fund” or “creditors’ buffer fund”, statutorily described as ”share capital plus undistributable reserves”. Historically, these purchased shares had to be cancelled.

Most recently, a public company is now allowed to purchase its own shares and, instead of canceling them, it may now choose to hold them “in treasury” until such time as it chooses either to cancel the shares or to sell them – effectively to re-issue them.
These are called “Treasury Shares” and here are some one-liners about them.

Shares held in treasury:
* are available for re-issue without the normal formalities associated with a share issue

* must have been quoted on a recognised stock exchange

* shall carry no voting rights

* shall not be entitled to receive a dividend or similar distribution

* when sold, shall cause any consideration received to be treated as a realized profit

* when cancelled, shall cause the company to send a return to the Registrar within 28 days detailing the cancellation and the number and nominal value of the cancelled shares

* may be held from initial issue by a company holding back a proportion of its shares for the purposes of a subsequent issue

When treasury shares are cancelled the company must send a return to the Registrar – a Statement of Capital – effectively confirming that the company continues to satisfy the minimum share capital requirements for a public company.
It is difficult to imagine that the examiner David Kelly will not ask an exam question in this area in 2012!