Companies in Singapore sometimes repurchase their own shares from the marketplace or existing shareholders. While these repurchased shares can be cancelled, companies also have the option under the Companies Act 1967 to hold these shares “in treasury”. These are known as treasury shares.

But what exactly are treasury shares, why do companies hold them, and what are the rules surrounding their use? This guide provides an overview for Singapore companies.

What Exactly are Treasury Shares?

Treasury shares are shares that a company has previously issued but has subsequently bought back from shareholders and now holds itself. Instead of being cancelled and ceasing to exist, these shares are kept by the company in its ‘treasury’.

As defined under Section 76H of the Companies Act 1967 (“Companies Act”), where a company purchases its own shares under the share buyback provisions (Sections 76B to 76G), it can choose to hold these shares (provided they are ordinary shares) as treasury shares.

Crucially, while held in treasury, these shares have diminished rights compared to ordinary outstanding shares.

How are Treasury Shares Created in Singapore?

Treasury shares arise exclusively from a company undertaking a share buyback exercise. A Singapore company is permitted to buy back its own shares under Section 76B Companies Act, subject to certain conditions:

  1. Shareholder Approval: The buyback must typically be authorised by the company’s shareholders via a resolution.
  2. Permitted Buyback Types: The buyback must follow specific procedures, such as an “equal access scheme” (off-market offer to all shareholders), selective off-market purchase, contingent purchase contract, or market acquisition (for listed companies).
  3. Solvency: The company must be solvent and able to pay its debts as they fall due during and after the buyback process (Section 76F Companies Act).

When a company buys back its ordinary shares through these approved methods, it can elect to hold them as treasury shares rather than cancelling them immediately.

Key Regulations Governing Treasury Shares

The Companies Act sets specific rules for treasury shares:

  • Holding Limit (Section 76I Companies Act): A company cannot hold more than 10% of the total number of issued shares of any given class as treasury shares. If a buyback results in this limit being exceeded, the company must cancel or dispose of the excess shares within 6 months.
  • Rights Attached (Section 76J Companies Act): While held in treasury, the shares do not carry any voting rights. The company cannot exercise votes in respect of treasury shares at meetings. Furthermore, treasury shares are not entitled to receive dividends declared by the company. They are also excluded when calculating metrics like Earnings Per Share (EPS).

Strategic Reasons for Holding Treasury Shares

Companies may choose to hold treasury shares for various strategic reasons:

  • Flexibility: Treasury shares can be re-sold relatively quickly in the market to raise cash when needed, potentially offering more flexibility than issuing entirely new shares.
  • Employee Share Schemes: They provide a ready pool of shares that can be transferred to employees under Employee Stock Option Plans (ESOPs) or share award schemes, avoiding the dilution that arises from issuing new shares.
  • Capital Management: Holding shares in treasury reduces the number of outstanding shares, which can improve financial ratios like EPS and Return on Equity (ROE) without undergoing a formal capital reduction process.
  • Market Signalling: A share buyback can signal management’s confidence that the company’s shares are undervalued.
  • Acquisition Currency: In some situations, treasury shares might be used as consideration for acquiring another business (though specific rules apply).
  • Defence Mechanism: Reducing the number of freely traded shares can make it slightly more difficult for a hostile takeover attempt.

Utilisation and Disposal of Treasury Shares

Section 76K Companies Act outlines how a company can use or dispose of its treasury shares:

  1. Sell: Re-sell the shares in the market for cash.
  2. Transfer: Transfer the shares (or rights to them) under an employee share scheme.
  3. Cancel: Extinguish the shares, which effectively reduces the company’s share capital.
  4. Distribute as Dividends: Use the shares to pay dividends to shareholders (share dividends).
  5. Transfer as Consideration: Transfer the shares as consideration for the acquisition of another company or assets (less common and subject to specific provisions).

Any cancellation or disposal of treasury shares must be notified to ACRA via the BizFile+ portal using the relevant form (“Notice of Cancellation or Disposal of Treasury Shares under S76K”).

Treasury Shares vs. Cancelled Shares

The key difference lies in their existence. When shares are bought back and cancelled, they cease to exist entirely, permanently reducing the company’s issued share capital. Treasury shares, however, legally continue to exist but are held by the company itself with restricted rights. They represent potential shares that can be brought back into circulation through sale or transfer.

Conclusion

Treasury shares offer Singapore companies a versatile tool for managing capital, rewarding employees, and pursuing strategic objectives. Governed by specific provisions within the Companies Act, particularly Sections 76H to 76K, their use requires careful consideration of the rules regarding holding limits, rights, and disposal methods. Understanding these regulations allows companies to leverage treasury shares effectively as part of their corporate finance strategy.

Navigating the rules around share buybacks and managing treasury shares requires careful compliance with the Companies Act. For expert guidance on corporate actions, compliance, and strategic use of treasury shares, Raffles Corporate Services Pte Ltd provides comprehensive corporate secretarial support.

For further assistance or inquiries, you can contact the Raffles Corporate Services team via email at hello@rafflescorporateservices.com.

Yours sincerely,

The editorial team at Raffles Corporate Services