Legal Definitions - treasury share

A treasury share (also known as treasury stock) refers to a portion of a company's own stock that it has repurchased from the open market or directly from its shareholders. Once a company buys back its own shares, these shares are no longer considered "outstanding" – meaning they are not held by the public or investors. While held by the company, treasury shares do not carry voting rights and do not receive dividends. Companies typically acquire treasury shares for various strategic reasons, such as to reduce the number of shares available to the public, to increase the value of remaining shares, to use for employee compensation plans, or to prevent hostile takeovers.

Here are a few examples illustrating the concept of treasury shares:

• Example 1: Enhancing Shareholder Value

  Imagine "Tech Innovations Inc." has 10 million shares outstanding. The company has a very profitable year and decides to use some of its excess cash to buy back 1 million of its own shares from the stock market. These 1 million shares are now considered treasury shares. By reducing the total number of outstanding shares to 9 million, Tech Innovations Inc. effectively increases its earnings per share (EPS) and often signals financial strength to investors, potentially boosting the stock price for the remaining shareholders.

  This example illustrates how a company uses treasury shares to reduce the total number of shares in circulation, which can improve financial metrics like earnings per share and potentially increase the value of the remaining shares held by investors.

• Example 2: Funding Employee Stock Option Plans

  "Global Solutions Corp." wants to offer stock options to its top executives and key employees as part of their compensation package, incentivizing them to contribute to the company's long-term success. Instead of issuing new shares, which could dilute the ownership of existing shareholders, Global Solutions Corp. decides to repurchase 500,000 of its own shares from the market. These repurchased shares become treasury shares and are then held by the company specifically to be granted to employees through the stock option program.

  This example demonstrates how companies can use treasury shares as a flexible pool of stock for employee compensation plans, avoiding the need to issue new shares and dilute the ownership percentage of current shareholders.

• Example 3: Preventing a Hostile Takeover

  "Heritage Brands Ltd." is a well-established company with a significant number of shares publicly traded. A rival company begins aggressively buying up Heritage Brands' shares on the open market, signaling a potential attempt to gain a controlling interest and initiate a hostile takeover. To defend itself, Heritage Brands Ltd. quickly initiates a large share repurchase program, buying back 2 million of its own shares. These shares become treasury shares, effectively reducing the number of shares available for the rival company to acquire and making it more difficult and expensive for them to gain a majority stake.

  This example highlights how a company can strategically use treasury shares to reduce the number of publicly available shares, thereby making it harder for an external entity to accumulate enough stock to take control of the company.