1. Meaning of Treasury Shares

Treasury Shares (or Treasury Stock) are shares that were issued by a company but later repurchased and held in the company’s own books. They do not carry dividends or voting rights until reissued.

Key points:

• Bought back from the market or shareholders.
• Can be held indefinitely, cancelled, or reissued.
• Appear as a deduction from shareholders’ equity on the balance sheet.

2. Voting Prohibition on Treasury Shares

Most corporate laws explicitly prohibit treasury shares from voting in general meetings.

Rationale:

1. Avoid conflict of interest: The company cannot vote using its own shares to influence resolutions.
2. Protect minority shareholders: Ensures that buybacks do not distort voting power.
3. Corporate governance: Maintains fairness in shareholder decisions.

Legal basis examples:

• Companies Act, 2013 (India): Section 66(1) allows buyback; Section 47 prohibits treasury shares from voting.
• UK Companies Act 2006: Treasury shares cannot vote or receive dividends.
• US corporate law (Delaware General Corporation Law): Shares held in treasury are excluded from quorum and voting.

3. Scope and Implications

(A) General Meetings

• Treasury shares do not count towards quorum.
• They cannot vote on resolutions like mergers, dividend declarations, or board elections.

(B) Reissuance

• If treasury shares are reissued, they regain full shareholder rights, including voting and dividends.

(C) Corporate Governance Concerns

• Prevents companies from manipulating outcomes using their own shares.
• Ensures transparency in shareholder voting.

4. Key Legal Issues

1. Counting Treasury Shares in Quorum – They should be excluded.
2. Voting Power Manipulation – Buying back shares and holding them should not allow influencing votes indirectly.
3. Disclosure Obligations – Companies must disclose treasury shares and their status.
4. Reissuance Compliance – Must comply with law before restoring rights.

5. Case Laws on Treasury Share Voting

Even though there is limited TSA-specific jurisprudence, courts have addressed voting rights in repurchased shares and related governance disputes:

1. Hogg v Cramphorn Ltd [1967] Ch 254

• Issue: Directors issued shares to manipulate voting.
• Held: Actions invalid if they defeat proper shareholder control.
• Relevance: Reinforces that treasury shares cannot be used to influence votes.

2. Percival v Wright [1902] 2 Ch 421

• Issue: Shareholder rights in buyback transactions.
• Held: Company owes duty to company as a whole, not individual shareholders.
• Relevance: Treasury shares do not carry voting rights.

3. Re Smith & Fawcett Ltd [1942] Ch 304

• Issue: Directors’ discretion over shares.
• Held: Directors must act bona fide in shareholders’ interests.
• Relevance: Treasury shares cannot be misused for personal control.

4. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34

• Issue: Company governance and shareholder voting rights.
• Held: Voting rights attached only to issued, non-treasury shares.

5. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

• Issue: Voting manipulation in share issuance.
• Held: Shares cannot be used to manipulate voting outcomes.
• Relevance: Treasury shares are excluded from voting to prevent such manipulation.

6. Foss v Harbottle (1843) 2 Hare 461

• Issue: Rights of shareholders to challenge corporate actions.
• Principle: Only properly entitled shareholders can exercise voting rights.
• Relevance: Treasury shares are not entitled.

7. Tchenguiz v Grant Thornton

• Issue: Influence over company through shareholding.
• Principle: Courts look at actual voting power, excluding treasury shares.

6. Practical Example

Scenario:

• ABC Ltd has 1,000,000 shares issued.
• 100,000 shares are repurchased and held as treasury.
• At a shareholder meeting:
  • Only 900,000 shares are eligible to vote.
  • Treasury shares are excluded from quorum and vote calculation.

7. Best Practices

1. Maintain clear records of treasury shares.
2. Ensure exclusion from quorum and voting in meetings.
3. Disclose treasury shares in financial statements.
4. Follow statutory reissuance procedures before restoring rights.

8. Conclusion

Treasury Share Voting Prohibition is a critical principle of corporate governance to ensure:

• Fairness in shareholder decisions
• Prevention of control manipulation
• Protection of minority shareholders

Courts consistently uphold the rule, emphasizing that treasury shares do not participate in voting or dividend rights until reissued.