UK: Treasury Shares: The New Regime

The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 (the regulations), which are due to come into force on 1 December 2003, will liberalise the regulatory regime that applies to certain companies wishing to buy back their own shares. Pursuant to the regulations, public companies quoted on the London Stock Exchange's main market, its Alternative Investment Market (AIM) or their EEA equivalents will be able to hold up to 10 per cent of their own shares in treasury, whether for resale, for transfer pursuant to an employees' share scheme or for cancellation.

Potential Benefits

At present, companies are often reluctant to buy back their shares, because of the current requirement under English law that such shares must be cancelled. When circumstances change, those companies may find they have to incur the expense of issuing new shares.

The regulations will give certain companies greater flexibility to manage their capital structures effectively and to achieve optimum financial gearing without the cost of issuing new shares. The Department of Trade and Industry (DTI) anticipates that this might lead to a reduction in companies’ overall cost of capital and could stimulate investment. Companies would have the option of reselling treasury shares in small lots through the market at full market price, which would operate as an alternative to rights issues and placings which can involve significant underwriting costs.

Treasury shares can also be used to satisfy the exercise of options and other rights granted under employee share plans. One commercial benefit of using treasury shares for this purpose is that they can be cancelled or sold if the rights lapse and, as is not the case with shares held in employee benefit trusts (EBTs), the company will itself retain the benefit/sale proceeds. Buying shares at the time of grant of an option and holding them in treasury pending transfer at exercise will allow employers to hedge their liability on the option, while avoiding the anti-dilution limits imposed by institutional investor guidelines. Employers routinely operate EBTs for this purpose as well as to take advantage of favourable tax treatment. However, the tax benefits of EBTs have been significantly reduced by recent legislation which, among other things, restricts the availability of corporation tax deductions for contributions to EBTs. Employers will therefore, in many cases, find treasury shares a more cost-effective solution.

Summary of the New Provisions

As at present, advance shareholder approval will be required for a purchase of its shares by a company and must specify the maximum number of shares which may be acquired, the minimum and maximum price which may be paid for the shares and the date on which such authority is to expire.

The name of the company (and not a nominee) must be entered in the register of members in respect of treasury shares held by it.

The purchase of shares for holding in treasury may only be financed out of distributable profits (unlike shares purchased for cancellation which, at present, can be financed out of the proceeds of a fresh issue of shares). Treasury shares may only be sold for cash.

If more than 10 per cent of the aggregate nominal value of the issued share capital of the company (or of the nominal value of the issued capital of the shares in any class) is held in treasury, the company must dispose of or cancel the excess shares within twelve months.

If the treasury shares are de-listed they must be cancelled forthwith (but not if they are suspended from listing or trading).

Pre-emption rights in Section 89 of the Companies Act 1985 (the Act) will apply to sales of treasury shares by a company (unless disapplied pursuant to Section 95 of the Act) but the treasury shares themselves do not attract pre-emption rights when the company is allotting new shares or when transferring them pursuant to an employee share scheme. However, in this respect, the voluntary Pre-Emption Group Guidelines should be borne in mind. These stipulate that an annual disapplication of pre-emption rights should be restricted to 5 per cent of the issued ordinary share capital and in any rolling three-year period (covering the three years immediately preceding the date of the issue in question) a company should issue no more than 7.5 per cent of its issued ordinary share capital by way of non pre-emptive issues for cash.

Companies holding shares in treasury may not exercise any rights (including voting rights and rights to dividends and other distributions) attaching to treasury shares, save that treasury shares will be eligible to participate in bonus issues.

Treasury shares should be excluded from the calculation when determining whether the compulsory acquisition procedure in Sections 428-430F of the Act can be invoked. Accordingly, there will be no need for treasury shares to be made subject to an offer.

Purchases, sales, transfers and cancellations of treasury shares must be notified to Companies House.

The market abuse regime under the Financial Services and Markets Act 2000 (FSMA) will apply to the sale of treasury shares.

Investors holding 3 per cent or more of a company's issued shares capital should exclude any treasury shares held by the company when calculating the percentage of the company's issued share capital that they hold, for the purposes of making disclosures under Section 198 of the Act.

Where the proceeds of sale of treasury shares are less than or equal to the price paid for them by the company, the proceeds are treated as realised profit. This is because the shares will have been purchased out of distributable profits as part of a buy back (unless the shares are allotted as bonus shares, in which case they are treated as having a purchase price of nil). Where the proceeds of sale exceed the purchase price the excess must be transferred to the share premium account (and the part equal to the purchase price is treated as realised profit).

If a company contravenes the new rules, the company's officers are liable to be fined.

Accounting Treatment

The Urgent Issues Task Force is currently consulting on the accounting treatment of treasury shares. Its draft abstract proposes that treasury shares should be presented as a deduction from shareholders' funds rather than recorded as an asset. It has also proposed that the purchase and resale of such shares should be accounted for as changes in shareholders' funds that do not give rise to gains or losses in the profit and loss account or statement of total recognised gains and losses. In effect, accounting for the purchase would be entered as a debit to distributable profits, which would be reversed upon the sale. Therefore (as any excess proceeds go to the share premium account), unless treasury shares are sold at a loss, the net effect on distributable reserves should be neutral.

Tax Treatment

In general, shares purchased into treasury will be treated as if they had been cancelled and shares sold out of treasury treated as if they had been newly issued. The sale of treasury shares will not normally give rise to a chargeable gain or allowable loss in the hands of the company. No income tax relief will be due to individual investors on shares sold out of treasury by a venture capital trust.

Under current legislation a company that purchases its own shares (and then cancels them) is subject to 0.5 per cent ad valorem stamp duty. The subsequent cancellation, resale or transfer of shares held in treasury will be subject to an additional fixed £5 stamp duty charge.

Impact on Other Rules and Legislation

Apart from extensive consequential amendments to the Act, the regulations will impact upon FSMA, the Listing Rules, the AIM Rules and the Takeover Code, the proposed amendments to which are currently under consideration.


Regulated Activity

Companies who frequently buy or sell their own shares pursuant to the regulations may be engaging in the regulated activity of "dealing in investments as principal" under Article 14 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). HM Treasury has proposed amending the RAO so that companies that do not use a broker will not need to seek authorisation from the Financial Services Authority (FSA) in order to buy back shares which they may hold in treasury, sell or transfer pursuant to an employees' share scheme. On 10 September 2003, HM Treasury issued a consultation paper in connection with this proposal. It also wants to ensure that companies wishing to buy back their shares for holding in treasury are not dissuaded from doing so by the cost of using a broker or other authorised person.

Financial Promotion

Companies that promote the buying-back of their shares for holding in treasury or the sale of such shares will fall within the restriction against financial promotion in section 21(1) of FSMA. However, there are no proposals to create a specific exemption in connection with this, as HM Treasury considers that most companies should be able to bring their conduct within existing exemptions under Articles 43 (members and creditors of certain bodies corporate) or 69 (promotions of securities already admitted to certain markets) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

The Listing Rules and the AIM Rules

The FSA's proposed amendments to the Listing Rules are designed to maintain investor protection and to reduce any perceived scope for market manipulation that the introduction of treasury shares may provide.

It is proposed that there will be a limit of 10 per cent on the discount to market price at which shares can be sold for cash non pre-emptively (unless the sale is either to a small number of shareholders specifically approved in general meeting and named in the relevant circular or the company is in severe financial difficulties or there are other exceptional circumstances).

In determining who is a "controlling shareholder" (those entitled to exercise or control the exercise of 30 per cent of the rights to vote at general meetings) treasury shares are not taken into account. Accordingly, the purchase of shares into treasury by a company could transform a shareholder currently near but under the threshold into a controlling shareholder.

Purchases of its own securities and sales and transfers of treasury shares by a company may generally not be made when the company is in a close period or in possession of unpublished price-sensitive information.

Sales and transfers of shares into and out of treasury must be disclosed (transfers into treasury could result from a buy-back or from an allotment of shares pursuant to a bonus issue).

As shares continue to be listed while held in treasury, no application for listing will be required when shares are sold or transferred out of treasury.

The FSA is expected to publish the final amended rules in October 2003. It anticipates that the possible reduction in companies' cost of capital may make the UK a more attractive place in which to list.

The London Stock Exchange is also considering minor amendments to the AIM Rules but it is not anticipated that they will be published for at least another month.

The City Code on Takeovers and Mergers (the Code)

The Code Committee proposes the following two principal changes to the Code and the SARS.

In calculating percentage holdings and voting rights, share capital and relevant securities, shares held in treasury are to be ignored.

A transfer of shares out of treasury will normally be treated in the same way as an issue of new shares. Therefore, the board of a target will be prohibited under Rule 21.1 from transferring shares out of treasury during the course of an offer or if it has reason to believe a bona fide offer might be imminent, without shareholder approval. It will also normally be possible to obtain a Rule 9 whitewash of a transfer of shares from treasury if the acquisition of such shares would otherwise result in a mandatory bid obligation being triggered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions