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New rules on treasury shares introduced - International Law Office

International Law Office

Company & Commercial - Isle of Man

New rules on treasury shares introduced

July 05 2010

Isle of Man public companies which are incorporated under the Companies Act 1931 are now permitted to purchase and hold a maximum of 10% of their own shares as treasury shares by virtue of the introduction of new regulations which came into effect on May 1 2010.

The Companies Act 1931 to 2004 (Treasury Share) Regulations 2010 apply where:

  • a market-traded company purchases its own shares in accordance with the provisions of the Companies Act 1992;
  • the purchase is made out of distributable profits; and
  • the shares are qualifying shares.

'Qualifying shares' are defined in the new regulations as shares (which are listed or traded on a market) of a market-traded company.

The ability of a company to purchase its own shares is well established under Isle of Man company law, the principal legislation dealing with this being the Companies Act 1992. Under that legislation, a company may purchase its own shares, provided that its articles of association allow it to do so. Further provision is made according to whether the purchase is made by way of an 'off-market' or 'market' purchase. In the case of a market purchase (essentially the purchase by a company of any of its own shares on a recognized stock exchange), the purchase must be authorized by the company in general meeting. A resolution authorizing market purchases may confer general authority or may be limited to a specific transaction. The authority must also:

  • specify the maximum number of shares authorized to be acquired;
  • determine both the maximum and minimum prices which may be paid for those shares; and
  • specify the date on which the authority is to expire (no later than 18 months after the date on which the resolution is passed).

The 1992 act further empowered the Financial Supervision Commission to make regulations to permit a company to hold its own shares as treasury shares.

The new regulations make provisions regarding the holding of treasury shares by the company and any subsequent disposal or cancellation of those shares. Once the shares have been acquired by the company, the company must be entered in the company's register of members as the member holding the share and a return in the prescribed form must be filed within one month at the Companies Registry.

Where a company has shares of only one class, the aggregate nominal value of the treasury shares must not exceed 10% of the nominal value of the issued share capital of the company. Where a company has different classes of share, the aggregate nominal value of the shares of any class held as treasury shares must not exceed 10% of the nominal value of the issued capital for that class. If the 10% threshold is exceeded, the company must dispose of or cancel the excess shares in accordance with the procedures set out in the new regulations.

The usual rights with respect to shares are suspended in relation to shares held as treasury shares such that the company may not: (i) exercise any right to attend or vote at meetings, or (ii) be paid any dividend or any other distribution of the company's assets (including any distribution of assets to members on a winding up).

In terms of the disposal of treasury shares, the company is permitted to sell them for cash consideration or to transfer them for the purposes of or pursuant to an employee's share scheme. In either case, a return in the prescribed form must be filed with the Companies Registry within one month.

If the proceeds of the sale of treasury shares are equal to or less than the purchase price paid by the company, the proceeds are treated as a realized profit of the company. If the proceeds of sale exceed the purchase price paid by the company, an amount equal to the purchase price paid is treated as a realized profit of the company and the excess must be transferred to the company's share premium account.

The company is further permitted to cancel treasury shares at any time, and must do so if the company becomes aware that the shares have ceased to be 'qualifying shares'. In this respect, shares will not be regarded as ceasing to be qualifying shares by virtue only of the suspension of their trading in accordance with the rules of the market upon which they are traded.

On cancellation of treasury shares, the company's issued share capital is reduced by the nominal amount of the shares cancelled, but it does not reduce the amount of the company's authorized share capital. A return must be filed with the Companies Registry with respect to any cancellation within one month of the date on which the shares were cancelled.

The new regulations are seen as a progressive development, enhancing the attractiveness of so-called '1931 act companies' by, among other things, allowing them to reduce the costs of capital maintenance through their ability to repurchase and hold treasury shares, as opposed to having to cancel shares on repurchase.

For further information on this topic please contact Christopher J Murphy at M & P Legal by telephone (+44 1624 695800), fax (+44 1624 695801) or email (cjm@mplegal.im).

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