UK: Treasury Shares

Last Updated: 3 March 2003

The DTI has published its final draft regulations allowing companies to buy, hold and re-sell their own listed shares.

The DTI has published the final draft of The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003. When implemented, these Regulations will allow listed and AIM companies to buy, hold and re-sell their own listed shares amounting to up to 10% of their issued shares. Shares held by the company in this way are referred to as treasury shares.

The DTI intends the Regulations to be laid before Parliament in Spring 2003 and come into force towards the end of July, at the same time as the Finance Bill. It has indicated that it does not anticipate any further substantive changes will be made to the Regulations before they are enacted.

Potential benefits

The DTI hopes that treasury shares will provide a simpler and cheaper mechanism for companies to make small adjustments to their share capital. However it is unclear whether the sale of treasury shares will be achieved more cheaply and easily than an equivalent issue of new shares. The main costs of issuing new shares are management and selling commissions and underwriting costs. These costs are market driven and, depending on how market practice develops, may also apply to a sale of shares from treasury.

Companies will be able to hold shares required for awards under most types of employee share schemes as treasury shares, rather than using employee benefit trusts. This may reduce the costs connected with running employee share schemes. The treatment of distributable profits on a sale of treasury shares may offer advantages over the treatment of distributable profits on a buy back, cancellation and later re-issue of new shares. This is discussed in more detail below.

Key features of treasury shares

  • The Regulations only apply to "qualifying shares". Broadly "qualifying shares" are shares listed on the Official List, AIM or a regulated market or official list of an EEA state. They do not apply to any other type of shares. If unlisted companies, including subsidiaries of listed companies, acquire their own shares the shares will still have to be cancelled.
  • The aggregate nominal value of shares a company holds in treasury may not exceed 10% of its issued share capital, or where the company has different classes of shares, 10% of such class of shares.
  • Pre-emption rights apply to the sale by a company of its treasury shares in the same way as they apply to an allotment of new shares. These pre-emption rights may be disapplied by the company’s articles or by special resolution.
  • Treasury shares may not be sold for non-cash consideration and cannot therefore be used as an "acquisition currency". A company may sell its treasury shares for cash, transfer them for the purposes of an employee share scheme or cancel them.
  • Shares to be held in treasury must be bought out of distributable profits of the company, not the proceeds of a fresh issue of shares.
  • There are no restrictions on the types of shares that can be treasury shares, subject to the shares being qualifying shares. For example, preference shares or redeemable shares may be held in treasury.
  • Shareholder rights attaching to treasury shares will be suspended for as long as the shares are held in treasury. This includes rights to attend and vote at meetings and pre-emption rights under a rights issue.
  • Treasury shares, whilst held in treasury, will not attract dividends or any distribution of the assets of the company on a winding up. However, they will still attract any issue of fully paid bonus shares, and if the shares are redeemable, be eligible for redemption.
  • The Regulations do not change the procedures companies must follow to permit the buy back of their own shares. The existing statutory requirements in relation to a purchase by a company of its own shares must still be followed in relation to the purchase of shares to be held in treasury.
  • Initial proposals that investment companies should not be allowed to hold treasury shares have not been included in the final draft Regulations. Investment companies will be able to hold treasury shares in the same way as any other listed company.
  • Treasury shares may not be held by a nominee – they may only be held in the name of the company itself.

Detailed provisions

The Regulations operate to amend the provisions of the Companies Act 1985 (the "Act") relating to companies buying and cancelling their own shares. Section 160(4) of the Act requiring companies to cancel shares which are bought back is disapplied in relation to listed shares bought back out of distributable profits, giving the company the option to hold these shares in treasury. New sections 162A to 162G are added to the Act setting out provisions relating to treasury shares.

A company may cancel its treasury shares at any time. If a company exceeds the 10% maximum for shares held in treasury every officer of the company may be liable to a fine. The shares representing the excess must be disposed of or cancelled within 12 months. If shares which a company holds in treasury cease to be listed at any time, the shares must be cancelled immediately. This does not apply if the listed shares are merely suspended.

Pre-emption rights

By virtue of a new sub-section 3A to section 94 of the Act, the pre-emption rights in section 89 of the Act apply to a sale by a company of its treasury shares, in the same way as they apply to an allotment by a company of new shares. These pre-emption rights can be disapplied under section 95 of the Act (either by the company’s articles or a special resolution) in the same way as pre-emption rights on an allotment of new shares can be disapplied.

Shareholder groups have not yet issued any guidance on the extent to which such disapplication may be acceptable, although it is likely that they will do so. We expect that treasury shares will be aggregated with new shares in calculating the upper limit on permitted disapplications of section 89 of the Act, although the guidelines may be relaxed to some extent where shares are repeatedly bought back and re-sold.

A company holding treasury shares may not include itself as a shareholder in any pre-emptive offer of further shares that it makes to its shareholders under section 89 of the Act.

Listing Rule provisions relating to share buy backs

The detailed provisions of Chapter 15 of the Listing Rules relating to share buy backs will continue to apply whether or not the shares are to be held in treasury.

Details of purchases by a company of its own shares have to be notified under the existing Rule 15.9 of the Listing Rules. The FSA has given no indication whether it will amend the Listing Rules to require companies purchasing their own shares to specify whether the shares being bought will be held in treasury or cancelled. Similarly the FSA has not indicated whether sales of treasury shares will also need to be notified immediately. Information on the purchase and sale of treasury shares will become publicly available in any event, as it has to be notified to Companies House (see below). This notification can, however, be made at any time within 28 days.

Listing Rule restrictions on dealings at price sensitive times

The existing provision of the Listing Rules restricting a company from buying its own shares at a time when a director would be prohibited from dealing in such securities under the Model Code (Rule 15.1) applies irrespective of whether the shares being bought will be cancelled or held in treasury.

The DTI has indicated that it intends to discuss with the FSA and the London Stock Exchange whether the Listing Rules and the AIM Rules should be amended to prohibit a company from selling treasury shares at price sensitive times.

Treasury shares in a takeover situation

The DTI has indicated that it intends to ask the Takeover Panel to consider amending the City Code to prohibit the sale of treasury shares whilst a company is the subject of a takeover offer.

Under the Regulations, treasury shares are excluded from the calculation of the 90% threshold an offeror has to achieve to be able to buy out minority shareholders under section 429 of the Act. In addition, a company may not sell its treasury shares if it has received a notice under section 429 of the Act that an offeror wishes to acquire any of those shares.

Distributable profits

The proceeds of sale of treasury shares are treated as realised profit up to the amount which the company paid for the shares. However, any excess is treated as unrealised profit and an equivalent sum must be transferred to the company’s share premium account. The cost of the shares is deemed to be the weighted average cost of the treasury shares held by the company (with the cost of bonus treasury shares taken as nil).

The treatment of distributable profits on a sale of treasury shares may offer advantages over the treatment of distributable profits on the issue of new shares. On an issue of new shares the entire consideration will need to be transferred to share capital and share premium account. In contrast, on a sale of treasury shares only the excess over the weighted average cost of the shares will need to be transferred to share premium account and the weighted average cost of the shares will be realised profit.

Employee share schemes

Treasury shares may be of benefit to a listed company that currently uses an employee benefit trust ("EBT") to acquire shares in the market for use under its employee share schemes.

Under the Regulations, such a company will now be able to buy treasury shares, which can be held in treasury for future transfer to employees in satisfaction of options or other share awards. This may lead to cost savings if the company would otherwise have funded an EBT to purchase shares in the market (for example, dealing costs).

However, EBTs may still be of use to listed companies. In particular, EBTs are often used by listed companies to get round the restrictive anti-dilution limits imposed by shareholder groups, such as the limit that no more than 10% of a company’s issued share capital can be subject to options to subscribe in any ten year period. From initial conversations with shareholder groups, it appears that options over treasury shares may still be counted towards the institutional limits. If this becomes the firm view of shareholder groups, EBTs will still need to be used where companies have little or no headroom to grant options to subscribe for shares.

Treasury shares will be inappropriate for employee share schemes where an employee is required to have a beneficial interest in the shares from the outset, such as an Inland Revenue approved Share Incentive Plan or an unapproved conditional share scheme. This is because treasury shares, while held in treasury, will not attract dividends and all other shareholder rights will be suspended.

Register of members and Companies House

Whilst shares are held in treasury, the register of members will show the company as the registered holder. Treasury shares will be included in the shareholder list on a company’s annual return in the same way as the shareholding of any other shareholder.

When a company buys shares to be held in treasury the company will have 28 days in which to notify Companies House of details of the purchase on a new form 169(1B). The notification will comprise information broadly similar to the information that a company currently has to notify upon a purchase of its own shares for cancellation. A further notification using a new form 169A(2) will be required when the company subsequently sells, transfers or cancels treasury shares. Similar notifications will also be needed in respect of the issue or sale of bonus treasury shares.


According to the DTI, purchases of shares into treasury followed by a resale of treasury shares will be taxed in the same way as a buy-back and cancellation of shares followed by a fresh issue of new shares. Whether tax advantages can be found by using one route over the other will depend on the detail of the implementing tax legislation, which is not yet available. The government’s aim is for it to be neutral, with no advantage either way.

Tax treatment of the company

Under current law, when a company buys its own shares, cancels them and later issues new shares, this has no tax consequences for the company. This will also be the case for shares bought and re-sold from treasury. In particular, the company will not make a taxable gain or loss at any stage.

Shares held in treasury will be excluded from issued share capital for tax purposes. This means that they will be ignored when determining whether companies are associated for tax purposes.

Tax treatment of shareholders

It is proposed that, when shares are bought into treasury, shareholders will be taxed in the same way as when shares are bought back and cancelled. Corporate shareholders will, under current law, be taxed only on any excess of the price for which the shares were originally issued over the price paid by the shareholder for the shares. Pension funds and charities will pay no tax on shares purchased from them and held in treasury. Individuals will be subject to capital gains tax on any excess of the original issue price of the shares over the price paid by the shareholder for the shares. In addition, individuals will be subject to income tax on the amount by which the buy back price exceeds the original issue price, although they will be entitled to a tax credit which will be set against the income tax liability.

Tax reliefs for fresh issues

A number of tax reliefs only apply where there is an "issue" of shares. The most significant of these is probably capital gains tax rollover relief on a takeover. It is proposed that the sale of shares from treasury will be regarded as an issue of shares for the purpose of these tax reliefs.

Stamp duty

Currently a repurchase of shares followed by cancellation is subject to stamp duty at 0.5% of the buy-back price. There is generally no stamp duty on the issue of new shares. This treatment will be replicated for treasury shares. A purchase of shares into treasury will trigger stamp duty at 0.5% but the sale of shares from treasury will be exempt from duty.

Do listed companies need to do anything now?

  • Do we need to put any additional resolutions to our forthcoming AGM in relation to treasury shares?

The Regulations do not require companies to have any specific authority to hold treasury shares. However, the existing requirements for shareholder approval of share buy backs still apply if shares are to be held in treasury.

It is usual for listed companies to put to their AGM’s resolutions disapplying statutory pre-emption rights up to a specified level and authorising certain market purchases of the company’s own shares. The usual form of resolutions used by listed companies for these purposes should be sufficient for the purposes of the Regulations, to allow shares purchased in the market to be held as treasury shares and to disapply statutory pre-emption rights on sales of treasury shares. However the specific wording should be checked to ensure that this is the case.

It is possible that the FSA will amend the Listing Rules to require that resolutions authorising market purchases of shares specify whether or not the shares will be cancelled or held in treasury. So far, however, the FSA has not indicated whether or not it intends to amend the Listing Rules in this context. Clearly if the Listing Rules are changed, this will have to be reflected in the resolutions put to AGM’s.

  • Will we need to amend our articles of association if we wish to use treasury shares? As long as your articles of association currently permit you to make market purchases of your own shares, no amendment to your articles should be necessary at this stage. It may however become usual to see some reference to a listed company’s ability to hold treasury shares in the articles of association of listed companies. When you next undertake a general review of your articles of association, you should review what is the current practice in relation to treasury shares and consider whether amendments are appropriate.

At this stage it is difficult to know to what extent treasury shares can be used to our advantage. This will become clearer once we know what changes will be made to the Listing Rules and AIM Rules and whether shareholder groups offer any flexibility in how they apply their guidelines to treasury shares.

A copy of the final form Regulations and a commentary by the DTI on the changes made to the draft regulations published in September 2001 are available on the DTI website at:

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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