What is treasury stock, and how does it benefit companies?

If your company is considering implementing an employee share scheme or paying your shareholders a dividend, the term ‘treasury stock’ may have popped up in conversation. But what exactly is treasury stock and are there any compliance or regulations that New Zealand companies need to be aware of? Read on to learn more about how treasury stock can impact your business. 

What is treasury stock? 

The term treasury stock (also known as treasury shares or reacquired stock) refers to when a company buys back outstanding stock from shareholders. For example, this can occur when employees leave a company and wish to sell their employee shares. The company repurchases these shares and holds them under the company name until a later date when these shares are either transferred to new employees or cancelled. 

How is treasury stock different from other company stock?

Unlike other shares in a business, treasury stock is not eligible for dividends and has no shareholder voting rights. Treasury stock is also not included in employee share scheme calculations. If a company decides to do so, treasury stock can be retired, which means that the shares are permanently cancelled, no longer listed as treasury stock, and can not be reissued at a later date. Alternatively, a company may decide to re-issue treasury shares through an employee share scheme compensation or a capital raise. 

Treasury stock compliance and regulations

When a company purchases treasury stock, it is essential to ensure that the stock is compliant with the Companies Act 1993. This means that the number of treasury stock acquired by the company, when aggregated with shares of the same class held by the company, does not exceed 5% of the shares of that class previously issued by the company. Previously cancelled treasury stock is not included in this percentage.

Companies are also required to maintain detailed records of treasury stock transactions. These must include details on the number of shares repurchased by the company, the price paid, and how the buybacks were financed. The company must have sufficient retained earrings to be able to finance the treasury stock. 

How Orchestra can help 

Since treasury stock is not eligible for dividend repayments or voting rights, it is crucial that a company keeps track of the number of shares that are treasury stock. Traditionally this was done by manually entering treasury stock into a spreadsheet; however, this approach leaves room for human error, such as forgetting to add treasury stock or creating duplicates.   

Orchestra’s product features save companies valuable time, not to mention the mental headache of manually calculating treasury stock. Spreadsheet calculations and human error become a thing of the past thanks to Orchestra’s smart technology and easy-to-use platform, which can automatically exclude treasury stock from the overall share count and dividend payments.  

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