Managing Employee Equity with Treasury Shares

A Flexible Solution for Your Company’s Equity Toolbox

What Are Treasury Shares?

Treasury shares are shares your company has issued and later repurchased, holding them in "treasury" instead of cancelling them. These shares don’t carry voting rights 🗳️ or pay dividends, but they’re far from useless! They’re versatile—perfect for employee share plans, reissuing to investors, or keeping in reserve for future needs. Think of them as a multi-purpose tool 🛠️ in your company’s equity toolbox!

Treasury shares are governed by sections 724–732 of the Companies Act 2006📜, which set out how companies can buy back their own shares and hold them in treasury rather than cancelling them.

How Do Shares Move Into Treasury?

Treasury shares don’t just appear out of thin air. Here’s how they get there:

1. Share Repurchase🔄: Your company can buy back shares from shareholders or the open market, often to reduce the number of shares in circulation or return value to shareholders. This process must follow Chapter 4 of Part 18 of the Companies Act 2006 and be funded from distributable profits. Stamp duty at 0.5% of the purchase price applies unless exemptions are met—for example, if the repurchase price is £1,000 or less, provided you file Form SH03 with the appropriate certification. Pro tip: You can even reclaim Stamp Duty Reserve Tax (SDRT) if the form is stamped within six years!
   
   
2. Unissued Shares Allocation🗂️: Sometimes, unissued shares are earmarked for treasury, ready to support employee share schemes or other future needs.
   
   
3. Articles of Association🏛️: Always ensure your articles of association don’t prohibit holding treasury shares. While there’s no legal requirement for specific authority in the articles, a quick check can save you a headache later.
   
   
4. No Reporting for Private Companies🚫: Good news for private companies: You no longer need to disclose share buybacks in the directors' report!
   
   

What Can You Do With Treasury Shares?

Treasury shares are like the Swiss Army knife of corporate equity. Here’s what they let you do:

• Hold Indefinitely: Keep shares in reserve for future use 🕰️
• Sell: Release treasury shares for cash consideration 💰
• Transfer: Use treasury shares for employee share schemes, like EMI plans 👩‍💼
• Cancel: Permanently remove treasury shares from circulation ❌
  
  

✨ Using Treasury Shares for an EMI Scheme

Treasury shares are a smart choice💡 for managing employee share plans like EMI schemes. Here’s how it works:

• Buy Back to Treasury: The company repurchases shares to hold in treasury, creating a pool for future use.
• Create an Option Pool: Designate a portion of treasury shares specifically for the EMI scheme, ensuring availability for employee exercises.
• Exercise and Transfer: When employees exercise their EMI options, the designated shares transfer directly from treasury to the employee—streamlining the process and avoiding dilution from issuing new shares.
  
  

Can Treasury Shares Be Issued to Anyone?

Yes, but there are a few important points to keep in mind🧠:

• Purpose and Approval: Issuance often requires board or shareholder approval, especially for employee share plans or investor allocations.
• No Dilution: Treasury shares are reallocated rather than newly issued, meaning they don’t dilute existing shareholders—though some institutional guidelines may treat them similarly to new shares for dilution calculations.
• Regulatory Compliance: Treasury shares can’t be issued below their nominal value and must stay within certain limits as a percentage of total shares.
• Clear Reporting: All issuances should be reflected on your cap table and reported to HMRC or Companies House if they affect share structures or employee share schemes.
  
  

What Are the Pros and Cons of Treasury Shares?

Treasury shares are a powerful tool, but it’s always smart to weigh the good and the not-so-good:

Pros 💡

• Flexible for employee share plans, sales, or cancellations.
• Helps manage share capital efficiently.
• Reduces reliance on costly alternatives like EBTs.

Cons ⚠️

• Can’t pay dividends, which may limit certain uses.
• Tax implications for sellers (treated as income rather than capital gains).
• May be subject to dilution limits or institutional restrictions, especially for listed companies.
  
  

Ready to Make the Most of Treasury Shares?

Treasury shares are a flexible, strategic tool for managing equity, supporting employee share plans, and maintaining control over your company’s capital structure—all without issuing new shares. With a little preparation, you can unlock their full potential and keep your cap table clean, efficient, and ready for growth🌟