Treasury shares are shares that were previously issued by a company, have been repurchased by the issuing company, and are held in the company’s treasury. These shares are not retired and, therefore, do not confer voting rights or the right to receive dividends. Treasury shares can be reissued by the company through resale or used for purposes such as employee compensation plans.
Characteristics of Treasury Shares
Definition and Nature
Treasury shares are an essential element in corporate finance, representing equity that a company holds within its treasury. This typically occurs after the company buys back its shares from the open market. Unlike issued shares held by shareholders, treasury shares do not carry the same rights or privileges:
- No Voting Rights: Holders of treasury shares cannot vote in shareholder meetings.
- No Dividend Entitlement: These shares do not entitle the holder to dividends.
- Potential for Reissue: Companies may reissue treasury shares to raise funds or as part of employee compensation plans.
Mechanism of Stock Repurchasing
When a company repurchases its shares, it can either retire them or hold them as treasury shares. Here’s how the process typically works:
- Board Approval: The company’s board of directors must approve any share repurchase plans.
- Market Operations: The company buys back shares from the open market or through a tender offer.
- Recording: Repurchased shares are recorded on the balance sheet as treasury stock, reducing shareholders’ equity.
Practical Examples
Example 1: Apple’s Share Buyback Program
Apple Inc. has been known to engage in share buybacks. When Apple buys back shares, they are recorded as treasury shares and may be reissued later or used for stock-based compensation.
Example 2: Tesla’s Market Operations
Tesla, Inc. has also repurchased shares as part of its capital management. These shares are held as treasury shares and serve as a flexible tool for various corporate needs.
Historical Context
Share buybacks and the concept of treasury shares have a well-documented history in corporate finance. Initially, companies repurchased shares to avoid hostile takeovers. Over time, buybacks have evolved as a means to return capital to shareholders, manage the capital structure, and utilize excess cash.
Applicability in Modern Business
Financial Strategy
Companies use treasury shares as part of their financial strategy for several reasons, including enhancing shareholder value and adjusting capital structure. They can reissue treasury shares to raise capital when needed without the need to create new shares.
Employee Incentives
Treasury shares are often reissued to employees as part of compensation or incentive plans, such as stock options or restricted stock units (RSUs).
Comparisons and Related Terms
Treasury Shares vs. Retired Shares
- Treasury Shares: Held in the company’s treasury and can be reissued.
- Retired Shares: Permanently cancelled and cannot be reissued.
Treasury Shares vs. Outstanding Shares
- Treasury Shares: Held by the company and not part of the outstanding share count.
- Outstanding Shares: Shares currently held by investors, excluding treasury shares.
FAQs
Can treasury shares be sold?
Do treasury shares affect earnings per share (EPS)?
Are treasury shares considered assets?
References
- Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance. Pearson.
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
Summary
Treasury shares play a crucial role in corporate finance, offering companies flexibility in managing their capital and returns to shareholders. Understanding the nature and implications of treasury shares is vital for investors, financial analysts, and corporate managers alike.
