Treasury shares

The four-state cycle of a share

Shares move through four states over their lifetime:

• Authorized. Permitted by the articles, but not yet issued.
• Issued and outstanding. Sold to a shareholder, held by them, voting, receiving dividends.
• Treasury (where permitted). Repurchased from the shareholder, held by the corporation. Not voting, not dividend-receiving, not counted as outstanding. Can be reissued or cancelled.
• Cancelled. Returned to the authorized-but-unissued pool. Cease to exist as issued shares.

US vs. Canadian treatment

The treasury-share regimes differ significantly. Under Delaware law, the board can choose at the time of a repurchase whether to hold the shares as treasury or to cancel them. Holding as treasury preserves optionality but adds an accounting line.

Under the Canada Business Corporations Act, the choice is removed: shares reacquired by the corporation are automatically cancelled by operation of statute (CBCA s. 39). There is no concept of treasury shares in CBCA practice. This affects how buybacks are modelled in a CBCA cap table: the buyback reduces both issued and outstanding shares immediately.

When treasury shares matter

For most early-stage private corporations, treasury shares are uncommon. They arise most often in three scenarios:

• Founder share repurchases on departure, where the corporation wants to hold the shares for future reissuance
• Buybacks from secondary sales, where the corporation acquires shares from an investor and may want to reissue to a new investor
• Repurchases under a stock plan, where unvested option shares revert to the corporation on termination of employment

In each case, the choice between holding as treasury and cancelling is a deliberate one with downstream effects on the cap table.