Treasury shares ( English treasury stock in the USA , English treasury share in the UK ) are shares owned by their issuer . Treasury shares do not have a voting right, are not vested with preemptive rights, do not participate in the distribution of dividends and the division of property in the event of the issuer's liquidation. Treasury shares are circulating - issued but not redeemed. However, they can be canceled in the manner specified by the charter and legislation with a corresponding reduction in the share capital .
Treasury shares should not be confused with government securities or US Treasury securities .
Share repurchase objectives
Usually, the issuer repurchases its own shares (makes a repurchase) for the following main purposes:
- Make payments to shareholders without dividends (to reduce overhead costs and as tax planning ).
- Increase earnings per share by reducing the total number of shares outstanding.
- Resell treasury shares with profit (if management is confident in the current undervaluation of shares on the open market ).
- Maintain liquidity or price levels of own shares in the secondary market.
- Implement an optional employee incentive program.
- Perform calculations at mergers and acquisitions .
- Protect yourself from hostile mergers and acquisitions.
- Help major shareholders or management buy out the issuer.
Legal restrictions
At present, in almost all countries, the buyback of shares is allowed, however, the regulation issue is solved in different ways. In Russia, the repurchase and circulation of treasury shares is regulated by Chapter IX of the Federal Law "On Joint-Stock Companies" (On JSC) dated 12.26.1995 N 208-ФЗ.
In order to protect shareholders and markets from manipulation, in some countries, issuers are legally limited in actions related to the acquisition, ownership and further distribution of treasury shares. The restrictions, in particular, relate to the issuer's very ability to own its own shares (for example, in the UK there was a ban from 1955 to 1993), the buyback procedure (for example, in the USA, buybacks are allowed no more than one broker per day with restrictions on periods acquisition, maximum daily volumes and buyback prices), the permissible maximum volume of treasury shares relative to the authorized capital, the deadline for such shares to be on the balance sheet (for example, in Russia, not more than a year from the date of acquisition), specifics of accounting, informing shareholders, etc.
Russian law does not provide for restrictions on the rights to find placed shares in the ownership of its subsidiaries (grandchildren, etc.) and affiliates. At the same time, corporate law in many Western countries applies a regime similar to that of treasury shares to such shares. Controlling shareholders and the management of Russian issuers take advantage of this legislative gap in their interests to the detriment of the interests of small shareholders. See, for example, the situation in Surgutneftegas to date or in Gazprom before the state receives a controlling stake.
Accounting
Typically, treasury shares are not an asset and are reported as a deduction from equity (value method) or as a decrease in the number of shares of a certain type (accounting method at face value). However, the legislation of different countries differently recommends reflecting some operations with treasury shares (for example, targeted repurchase of own shares).