Treasury Shares

Profession:Herbert Smith
 
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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...

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