By James Partridge, Partner. Contact Thomson Snell and Passmore 01892 510000.
Treasury shares are shares that a company holds in itself which have been bought back from a shareholder.
The regime for the buyback by a company of its own shares changed on 30 April 2013. Private companies and unlisted companies can now hold their shares in treasury. Prior to then, only public listed public companies could buyback their shares and hold them as treasury shares.
However, it is important to note that a company cannot exercise any rights in respect of treasury shares. Consequently, voting rights are suspended (as are dividend payments) when shares are held in treasury.
The new regime provides private companies with the ability to warehouse shares. This could be particularly helpful for private equity backed companies where a key employee with an equity stake leaves the business before a successor has been identified. In such circumstances, the company could hold the shares until the new employee joins and the shares are transferred to him or her.
Prior to the introduction of the new regime, companies would typically only buy back shares out of distributable profits. Effectively, this precluded heavily indebted and most young companies from buying shares in, due to the absence of distributable profits.
Subject to including appropriate provisions within a company’s articles of association, the new regime also allows for a company without distributable profits to buy back shares in cash up to the lower amount of £15,000 in any financial year or 5 per cent of the company’s issued share capital.