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Until the company reissues these shares, the shares are held in its’ “treasury”.

IT has become fashionable for listed companies to table, at successive Annual General Meetings, resolutions to purchase their own shares. Invariably, the shares that are so reacquired by these companies are then held as “treasury shares”.

Treasury shares have been defined as “… ..fully paid up issued shares of the company that have subsequently been acquired by that company whether by way of purchase, redemption, forfeiture, donation or otherwise and which the company, instead of having to cancel on their reacquisition, is permitted to reissue, or rather to sell, for what they will fetch at the market” (F Cassim).

Until the company reissues these shares, the shares are held in its’ “treasury”. Treasury shares are thus issued shares of the company which belong to the company, which have not been cancelled or restored to the status of unissued shares, and which are subject to resale by the company.

The purpose of this article is to generate a debate on whether it is lawful for Zimbabwe register companies to hold Treasury shares pursuant to a repurchase. My opinion on this issue is that, notwithstanding the commonness of this practice in Zimbabwe, it appears that it maybe be unlawful for companies to hold treasury shares following a share buyback.

Section 78 of the Companies Act (the Act) empowers a company to purchase its own shares (commonly referred to as share buyback). Section 78 (1) provides that a company may, if authorised by its articles of association, purchase its own shares, including any redeemable shares. Material to my argument is section 78(2) of the Act which states that section 76 and section 77 of the Act apply whenever a company purchases its own shares in terms of the authority given under the Act.

Now section 77 of the Act deals with financing of redemption of redeemable shares, and as already explained equally applies to any share buyback by virtue of section 78 (2) above.

Section 77 (4) states that shares redeemed under this section shall be treated as cancelled on redemption and the amount of the company’s share capital shall be diminished by the nominal value of those shares, but the redemption of shares by a company shall not be taken as reducing the amount of the company’s authorized share capital.

In terms of section 77(4), it is clear that the pursuant to a share buyback, a company should only reduce its share capital proportionally by cancelling the issued shares and not holding on to these shares for treasury purposes. This cancellation has no effect on the authorized but unissued share capital, which should remain the same.

Section 83 (1) of the Act which also applies to share buy backs, reinstates the position in section 77(4) of the Act and particularises the accounting treatment pursuant to a share back by the company. The provision states that where shares of a company are redeemed or purchased wholly out of the company’s profits, the amount by which the company’s issued share capital is diminished on cancellation of the shares concerned shall be transferred to a reserve, to be called the capital redemption reserve.

Leaving the discussion of the legality of treasury shares aside, it cannot be ignored that there are various problems which are associated with treasury shares chiefly the issue of market rigging and manipulation of share prices. It is possible that directors of companies could use these treasury shares for their own benefit rather than the general body of shareholders, or circumvent the shareholders preemptive rights as enshrined in the Zimbabwe Stock Exchange Listing Rules.

In a leading American reported case on treasury shares namely Borg v International Silver Co., the learned Judge had serious misgivings about the whole concept of treasury shares. He stated that to carry treasury shares as an asset on the balance sheet at cost was “a fiction, however, admirable”. It has been argued repeatedly that treasury shares are not really an asset. Should the company become insolvent treasury shares simply disappear or represent nothing to the creditors of the company. In the Borg case above, it was concluded that “at best, treasury shares represent an opportunity to acquire new assets for the company.”

In view of the problems associated with treasury shares, it is my submission that, if the legislature in Zimbabwe wanted to provide for treasury shares under the Companies Act, it should have done so in clear and unambiguous language for example as provided under the English Companies Act 2006 see (s706).

However, that having been said, certain progressive jurisdictions like the United Kingdom have embraced the concept of treasury shares and with it have put in a lot of legislative safeguards to protect the company and shareholders. Some aantages for allowing companies to hold Treasury shares which include the following

l It would confer on companies additional flexibility which effectively would enable them to manage their level of capital in the same was as they manage other resources in the company. Companies would be able to manage their debtequity ratio efficiently, thereby reducing the cost of capital and achieve optimal gearing without incurring costs if issuing new shares.

l Public companies would be able to avoid underwriting costs,

l By purchasing shares when the market is down and then reselling when the market is up, the company would be able to improve its return to shareholders.

I agree with the view that it makes sense that companies should be allowed to hold treasury shares, provided that there is sufficient regulation to protect the investors and the company. I am however, of the opinion that as the law presently stands it does not appear that companies have the latitude to hold on to their own shares as treasury shares as is the common practice with many companies. It looks like the Companies Act only permits companies to purchase own shares for cancellation only.

Stephen Nyabadza is a Commercial Lawyer and writes in his own capacity. The views and opinions expressed in this article are of the author and do not reflect the views of any organisation associated with the author. For your questions and comments email stephen.nyabadza@yahoo.com

Source : Financial Gazette