The ‘Silent’ Shares: What are Treasury Shares, and how should they be recorded?

While rarely headline-grabbing, the confirmation statement is one of the most important statutory filings a company makes each year. It serves as a public snapshot of the company's corporate structure and ownership, and for many third parties (such as buyers, investors, lenders, regulators), it is a key starting point for understanding who owns and controls the business.

A particularly niche issue that has arisen on recent transactions, however, is how “treasury shares” should be reflected in a company’s confirmation statement. The Companies House guidance on this point is, at best, ambiguous – and yet the consequences of overlooking treasury shares, or incorrectly excluding them from the statement, can be both time-consuming and costly, particularly in the context of corporate transactions.

What are treasury shares, and when do they arise?

Treasury shares are shares that have been previously issued by a company and subsequently repurchased by that company, but not cancelled. Instead, the shares are held “in treasury”; that is, they remain part of the issued share capital of the company, but are not held by any shareholder.

This situation most commonly arises following a share buyback. If a company buys back its own shares and immediately cancels them, they are removed from issue and cease to exist. However, where a company buys back shares out of distributable profits using the "treasury shares" route, those shares can be held in treasury indefinitely. They may later be re-sold, transferred, or cancelled, depending on the company’s objectives.

A company may choose to hold shares in treasury for several reasons – it allows for flexible reissue of shares (instead of having to allot new shares in the company further down the line), and can prevent any dilution of existing shareholders that might arise were those same shares cancelled instead. It is worth bearing in mind, though, that a company cannot hold more than 10% of its issued share capital in its treasury at any given time.

Importantly, while treasury shares do not carry voting rights or entitle the company (as holder) to dividends, they remain legally issued shares. They are very much part of the company’s issued share capital for legal and accounting purposes.

Should treasury shares appear on the confirmation statement?

This is where the position becomes less clear-cut.

The confirmation statement (CS01) requires a company to confirm, amongst other things, the total number of shares in issue and how each such share is held. The statutory form and the accompanying Companies House guidance do not explicitly reference treasury shares. As such, it is not immediately obvious whether treasury shares should be included in the totals disclosed on the form.

That said, the prevailing view, and the one we advise our clients and their advisers to adopt, is that treasury shares should be included in the share capital totals disclosed in the confirmation statement.

Why? Because these shares are, in law, still issued. They may not belong to a shareholder, and they may not carry rights while held in treasury, but they are nonetheless part of the company's issued share capital. Omitting them from the confirmation statement, therefore, risks understating the true size of the company's share capital, something which can lead to confusion or scrutiny in the context of a future sale of the company.

In practice, we recommend that companies include treasury shares in the relevant totals alongside a note for clarification (typically in the “additional information” section) to confirm the number of shares held in treasury and to explain that such shares carry no voting or dividend rights while held in treasury.

What are the risks of getting this wrong?

While this might seem like a technical or low-risk point, we have seen first-hand how such discrepancies can create real problems, particularly when a company is preparing for investment or sale.

In the context of due diligence, buyers and their advisers will closely scrutinise a target company’s confirmation statements, statutory registers, and Companies House filings. If the issued share capital recorded in the confirmation statement does not match what appears in the registers, or if the existence of treasury shares is not properly explained, this can raise red flags. Questions will follow. Delays will mount. In some cases, corrective filings may be required before a transaction can progress, which will come with an otherwise-avoidable price tag.

From a buyer’s perspective, a mismatch between the company's filings and its actual legal structure is a material concern. It suggests that record-keeping may be unreliable, or worse, that the company’s understanding of its own share capital is flawed. For the seller, this can result in a frustrating and expensive detour in the sale process, often involving late-stage legal advice and Companies House amendments to bring filings back in line.

At Leathes Prior, we regularly advise companies on the practical and technical aspects of share capital management, including the acquisition and holding of treasury shares, and compliance with the buyback regime. We often conduct company audits and compliance reviews for our clients, particularly ahead of a sale or investment round, so that any issues can be headed off and nipped in the bud.

Ahead of any major corporate activity, we would strongly recommend taking a moment to review your confirmation statements to ensure they accurately reflect the company’s issued capital position over time. It’s a minor issue on the surface, but one that can have significant practical consequences if left unaddressed.

If you would like some guidance on any of the issues raised in this article, please do contact our Corporate Team via info@leathesprior.co.uk or call 01603 610911.