In May 1998 and September 2001 the Department of Trade and Industry (“DTI”) consulted on whether there should be a change to the Companies Act 1985 requirements governing purchases by companies of their own shares. At present, a company that purchases its own shares is required to cancel them and the law prohibits the purchased shares from being held “in treasury” for resale at a later date.
The current buy-back rules give companies the ability to increase their debt to equity ratio, but because of the requirement to cancel the shares repurchased, companies can be reluctant to purchase their own shares if there is a risk that they may later have to incur the expense of issuing new shares. As a result, share buy-backs are often seen as too cumbersome for anything other than large step reductions in equity
capital.
However, the government felt that liberalising the regime to allow for treasury shares would give companies greater flexibility to manage their capital structures – i.e. they will be able to adjust their share capital to achieve optimum financial gearing without the costs of issuing new shares. This, in turn, should lead to a reduction in companies overall cost of capital.
Allowing companies to resell treasury shares in small lots to the market at full market price provides them with an alternative to other types of transactions such as rights issues and placings of shares which often involve significant underwriting costs.