Amongst other things, the ability to hold Treasury Shares provides private companies with an alternative option to establishing an Employee Benefit Trust (EBT) for the purposes of employee share schemes. Here is a practical outline of the Treasury Shares regime and compares the position to that of the EBT.
1. What is a Treasury Share?
A treasury share is a share which a company holds in itself. The concept of companies holding shares in treasury was introduced in 2003 to allow publicly listed companies to buy back their own shares and to hold them rather than cancel them. Amongst other things, this allowed such companies to improve liquidity in their shares by using treasury shares to satisfy demand.
Shares could only be held in treasury if they were listed or traded on a regulated market, which in effect precluded private companies from holding treasury shares. Any shares bought back by a private company from its shareholders had to be cancelled.
2. A change to the law for Private Companies
Following the publication of the Nuttall Review into employee share ownership in July 2012, the government consulted on proposals to facilitate employee share ownership in private companies by simplifying the process for companies purchasing their own shares and allowing them to then hold such shares as treasury shares. The responses to the consultation were largely positive and on 30 April 2013 the Companies Act 2006 (Amendment of Part 18) Regulations 2013 (the “Buyback Regulations”) came into force, allowing private companies to hold treasury shares for the first time.
3. How does a company purchase shares into treasury?
Shares can only be held as treasury shares if they have been bought from a shareholder out of distributable profits, or for cash up to annual limit of £15,000 (or if less the value of 5% of the issued share capital. Shares bought back out of capital or from the proceeds of a fresh issue of shares cannot therefore be transferred to treasury.
The usual rules relating to share buybacks continue to apply, as amended by the Buyback Regulations. Stamp duty will be payable by the company at the rate of 0.5%, unless the consideration is less than £1,000. There is no limit on the number of shares that can be held as treasury shares.
4. What about the rights attached to the Treasury Shares?
When shares are held in treasury, the name of the company must appear in the register of members as the shareholder. The company must not exercise any of the rights attached to the shares, including any right to attend and vote at general meetings. The shares will carry no right to receive a dividend or other distribution whilst they are in treasury, although if there is a fully paid allotment of bonus shares that applies to the treasury shares, the company is entitled to keep them.
5. What can a company do with Treasury Shares?
A company can hold treasury shares indefinitely. Alternatively it can sell them for cash, transfer them pursuant to an employee share scheme or cancel them. If the company elects to sell the shares, the directors do not require authority to allot the shares under section 551 of the Companies Act 2006. However, the statutory pre-emption rights on new share issues do apply, so the treasury shares must be offered pro rata to the existing shareholders unless the pre-emption rights have been disapplied.
Where treasury shares are sold for cash, the proceeds of the sale are treated as a realised profit up to the amount the company paid for them. Where they are sold for more than the company paid for them, the excess is transferred to the company’s share premium account. This is one of the benefits for a company buying back shares and holding them in treasury. The distributable profits which are used to purchase the shares can be replaced by the proceeds of the sale of those shares, in contrast to the position where the shares are cancelled and the distributable profits are lost.
So, why might you want to use Treasury Shares with your Employee Share Scheme?
If your company operates an employee share scheme you can use treasury shares to facilitate a market in its shares. When an employee shareholder leaves your company, the company can buy back the employee’s shares and hold them in treasury. Another shareholder could instead buy back these shares personally but to do so might mean having to take money out of the company and so buying the shares out of taxed income. The alternative approach would be to set up an employee benefit trust (“EBT”) which borrows from the company and warehouses the shares.
Using treasury shares has certain advantages over an EBT. First there is the cost of setting up and administering the EBT. Secondly, if you sell your company with unallocated shares held in an EBT this will complicate the sale process particularly if non-cash consideration is being paid. Taking money out of the EBT by paying bonuses will mean PAYE and Employers’ NIC. In contrast, if there are still shares held in Treasury that are not needed to meet employee options then this should not concern you or the buyer of your company.
No stamp duty is payable (in most circumstances) on the disposal of treasury shares, whereas stamp duty is payable at 0.5% on the transfer of shares from an EBT to an employee. You could, of course, simply buy-back and cancel the shares and operate your share scheme using just new issue shares. But if you do so you will lose forever the distributable reserves used for the buy-back. By holding the shares in Treasury the reserves can perhaps be restored quite quickly if the warehousing is short term.
James Hunt is a versatile business lawyer with many years experience of mergers and acquisitions, private equity and new issue work as well as setting up share schemes and advising on commercial contracts including technology licences.