Legal Definitions - treasury stock

Treasury stock refers to shares of a company's own stock that the company has repurchased from the open market. Once reacquired, these shares are no longer considered "outstanding" – meaning they do not carry voting rights, do not receive dividends, and are not included when calculating the company's market capitalization or earnings per share. However, they are not formally retired or canceled, which means the company can choose to reissue them at a later date.

Companies typically repurchase their own shares for various strategic reasons, such as:

• To return capital to shareholders.
• To increase the value of remaining outstanding shares (e.g., by boosting earnings per share).
• To use for employee stock option plans or other compensation.
• To prevent hostile takeovers.

Here are some examples to illustrate the concept of treasury stock:

• Example 1: Boosting Shareholder Value

  Imagine "Tech Innovations Inc." believes its stock is currently undervalued by the market. To signal confidence in its future prospects and potentially increase the stock price, the company announces a program to buy back 5 million of its own shares from the open market. Once these shares are repurchased, they become treasury stock.

  How it illustrates the term: These 5 million shares are now held by Tech Innovations Inc. itself. They are no longer "outstanding" in the hands of public investors, so they don't have voting rights, don't receive dividends, and are excluded from calculations like earnings per share. By reducing the number of outstanding shares, the company aims to make the remaining shares more valuable, benefiting existing shareholders.

• Example 2: Funding Employee Stock Plans

  "Global Solutions Corp." has an employee stock option program that allows its employees to purchase company shares at a set price. Instead of issuing brand new shares, which would dilute the ownership percentage of existing shareholders, Global Solutions Corp. decides to use shares it previously bought back from the market.

  How it illustrates the term: The shares Global Solutions Corp. had repurchased and held are now classified as treasury stock. The company can then use these existing treasury shares to fulfill the employee stock options. This way, the company provides stock to its employees without increasing the total number of shares in circulation, thus avoiding dilution for other investors.

• Example 3: Strategic Reissuance

  "Green Energy Ventures" had repurchased a significant block of its own shares several years ago when its stock price was low, holding them as treasury stock. Now, the company needs to raise capital for a major expansion project but doesn't want to take on more debt. Instead of issuing entirely new shares, it decides to sell some of its existing treasury stock back to institutional investors.

  How it illustrates the term: The shares held by Green Energy Ventures were treasury stock – issued but not outstanding. By selling these shares, the company is reissuing them. They transition from being treasury stock back to being outstanding shares, now held by new investors, providing the company with the capital it needs without creating new shares from scratch.