Treasury shares: Overview, definition, and example
What are treasury shares?
Treasury shares are shares that a company has repurchased from shareholders and holds in its own treasury. These shares are no longer considered outstanding, meaning they don’t carry voting rights or earn dividends. Companies may buy back shares to reduce the number of shares in circulation, increase stock value, or retain them for future use, such as issuing them to employees as part of stock compensation plans.
For example, if a company originally issued 1 million shares to the public but later buys back 100,000 shares, those shares become treasury shares and are no longer counted as part of the company’s outstanding stock.
Why are treasury shares important?
Treasury shares allow companies to manage their capital structure strategically. By repurchasing shares, a company can reduce the total number of shares available in the market, potentially increasing the value of remaining shares. They can also be used for stock-based compensation, mergers, or reissuance at a later date.
However, treasury shares don’t generate dividends and can’t be voted on in shareholder meetings. Some jurisdictions also have legal restrictions on how long treasury shares can be held or whether they must be canceled after repurchase.
Understanding treasury shares through an example
Imagine a publicly traded company has 10 million shares outstanding. The company decides to buy back 500,000 shares from the market to reduce dilution and boost stock value. These shares become treasury shares and are held by the company. If the company later needs to raise capital, it could reissue these shares instead of issuing new ones.
In another example, a company repurchases 200,000 shares and holds them as treasury shares. A year later, it decides to use these shares for an employee stock option plan, granting them to employees as part of their compensation package. Because the shares were already in the company’s treasury, no new shares had to be issued.
Example of a treasury shares clause
Here’s how a treasury shares clause might appear in a contract:
"Any shares repurchased by the Company shall be designated as Treasury Shares and shall not carry voting rights or entitle the holder to dividends unless reissued to shareholders or retired in accordance with applicable law."
Conclusion
Treasury shares are an important tool for companies to manage their stock, adjust market value, and retain flexibility in future financial decisions. While they don’t carry voting rights or dividends, they can be used strategically for stock-based compensation or capital restructuring.
If you’re dealing with treasury shares in a contract or financial agreement, Cobrief can help review the terms to ensure they align with your business goals.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.