What are treasury stocks and how they differ from other types
Shares are divided into ordinary and preferred, their differences affect the ability of owners to participate in corporate decision-making, as well as the accrual of dividends. However, in addition to these types, a distinction is made between treasury and quasi-treasury stocks. The former are owned by the issuing company, which first issued the securities to the market and then repurchased some of them. If these shares went on the company’s balance sheet, they are considered treasury stocks. Now they do not give the right to vote in decision-making and no dividends are accrued on them. However, such shares have a special status and a special mechanism is applied to them in order to distinguish them in the company’s general accounts. For example, the securities must not be on the balance sheet for more than 1 year. After this period, they must be redeemed or sold at a price no lower than the market price. Redemption of treasury stocks means reducing the amount of share capital, and this decision is made by the shareholders at the meeting.
There are several options as to why a company repurchases its securities. One is to purposefully reduce its share capital. Alternatively, the stock can be sold at a high price, which will make a profit for the business. However, the most common case is the purchase of treasury stocks in order to settle with it in the future. This could be a merger, a takeover, or payments in the form of a bonus to a company’s management.
In the balance sheet, shares are in the category “Equity” and are liabilities. In general, the processes of redemption of these securities and their acceptance on the balance sheet have a number of specific features. As for the issue of voting rights, the legislations of different countries have their own vision. For instance, cross-ownership is allowed in Russia, but it is prohibited in the USA and the European Union. The issuing company may transfer shares to the balance of its subsidiary within a year. Thus, the management of the subsidiary will be able to influence the management of the parent company as one of the shareholders.
This option is used quite often, since the transfer of treasury securities to the balance sheet of one of the subsidiaries gives the possibility to vary the allowed period of holding them with the issuer.
If the shareholding exceeds 2%, its owner may propose candidates for the board of directors of the company. If the stake is more than 10%, then the shareholder may arrange for an extraordinary vote of the board. If a shareholder owns 25% or more, then the shareholder has the opportunity to review information from the books.
However, it should be understood that cross-ownership of treasury securities can lead to a conflict of interest. Therefore, many countries exclude such a holding option.
