The acquisition of treasury shares is a hot topic. Companies often wonder whether they are allowed to acquire their own shares in connection with employee participation programs, upon the departure of shareholders or in other situations.In the following article, I will address some of the most important questions in connection with the acquisition of treasury shares. The overview does not replace individual advice but should provide initial practical points of reference.
Is my company allowed to acquire its own shares?
Yes, a company may acquire its own shares provided the following conditions are met. The acquisition of treasury shares is regulated in Art. 659 and 659a of the Swiss Code of Obligation (CO):
- Presence of freely available equity: A company must have freely available equity in the amount of the purchase price of the shares when acquiring its own shares. The term "freely available equity" is explained below.
- Compliance with statutory acquisition limits (10% or 20%): A company may generally only acquire treasury shares up to a maximum of ten (10) percent of the share capital registered in the commercial register. However, if the acquisition is in connection with a transfer restriction (e.g. to defend against unwanted share acquisitions according to Art. 685b para. 1 CO) or a dissolution lawsuit, the maximum limit is twenty (20) percent of the share capital. The shares acquired in excess of ten (10) percent must however be sold within two (2) years or cancelled through a reduction in capital.
- Compliance with the principle of equal treatment: The principle of equal treatment must be observed when acquiring own shares. Specifically, this means the following:
- A company may only limit a purchase offer to individual shareholders if the restriction is justified on factual grounds and the remaining shareholders are not unfairly disadvantaged.
- The company must further offer the acquisition of treasury shares to all willing sellers on identical terms and conditions.
- The acquisition of own shares must generally take place at market value ("at arm's length").
If treasury shares are acquired free of charge (i.e. without consideration), the ten (10) percent limit does generally not apply. The requirement of the presence of freely available equity does not apply either. However, the principle of equal treatment must still be observed.
What does freely available equity mean?
The term "freely available equity" describes the amount of distributable reserves.
Reserves are distributable as long as they are not protected by law. Protected reserves are the share capital and the statutory capital reserve and the statutory profit reserves in an amount of fifty (50) percent or twenty (20) percent (for holding companies) of the share capital registered in the commercial register (Art. 671 para. 2 and Art. 672 para. 2 OR). The calculated amount of unprotected reserves (and profit) must then be reduced by any existing negative positions for treasury shares and interim dividends.
The result is the freely available equity.
The availability of freely available equity is to be assessed based on the last balance sheet approved by the general meeting. Ongoing losses must be taken into account however.
May a company subscribe to its own shares in the context of a capital increase?
Yes. A company may subscribe to its own shares in the context of a capital increase provided the aforementioned general conditions are met. In this case, the acquisition value corresponds to the issue amount. The subscription to new shares is treated the same as the acquisition of shares.
What are the consequences of violating the statutory provisions on the acquisition of own shares?
The violation of the legal regulations regarding the acquisition of treasury shares does generally not result in the nullity of the purchase contract, but may lead to the responsibility of the board of directors in the event of damage.
However, if the acquisition of treasury shares is not made from freely available equity, there may be a violation of the prohibition to return deposits, which could potentially make the acquisition null and void (Art. 680 para. 2 OR). This, however, depends on the individual case.
Who is competent to purchase treasury shares?
The purchase and resale of treasury shares is exclusively within the competence of the board of directors (and not the general meeting). The board of directors is also liable in the event of a violation of the corresponding provisions.
What rights are associated with treasury shares?
The voting and associated rights of treasury shares (e.g. right to convene a general meeting, right to participate, right to information, right of access and right to request) are suspended. The votes concerning treasury shares are therefore not to be taken into account in the vote count and the statutory or statutory absolute or relative majority.
What should be considered from a tax perspective when purchasing own shares?
Generally, if a company purchases its own shares from an individual, there is a tax-free capital gain at the level of the individual. However, this principle does not apply without restriction. If there is a so-called direct partial liquidation, the positive difference between the purchase price and the nominal value (and any capital contribution reserves, KER) is subject to income and withholding taxes as a liquidation dividend.
If the shares are acquired for free, there are no income and withholding tax consequences for the selling individual.
What is a direct partial liquidation in the context of purchasing treasury shares?
In the following three cases, the purchase of own shares results in a direct partial liquidation with the corresponding income and withholding tax consequences:
If a company purchases treasury shares for the purpose of a formal capital reduction, the selling shareholder receives a taxable liquidation dividend. The difference between the sale price and the nominal value is subject to income and withholding taxes.
No tax consequences arise if the purchasing company classifies the treasury shares as "treasury shares against capital reserves (KER)" at the time of purchase.
If a company purchases own shares of more than ten (10) percent of the registered share capital, this results in a liquidation dividend subject to income and withholding taxes.
The same applies if the twenty (20) percent threshold of Art. 659 para. 2 OR is exceeded. The taxation takes place at the time of repurchase.
If a company acquires its own shares in violation of the maximum holding period, tax consequences for the portion between ten (10) and twenty (20) percent of the share capital will arise at the moment when the holding period exceeds two (2) years.
For the remaining shares, the tax will be levied after the following holding periods:
- Six (6) years for shares acquired within the allowed acquisition limits, i.e. a company must resell its own shares acquired within the ten percent limit within six (6) years. If it does not, tax consequences will arise.
- Twelve (12) years for shares acquired in connection with an employee participation plan.
- No limited holding period applies to shares connected to convertible bonds. In such cases, the holding period will stand still until the relevant obligations in the bond expires.
In the aforementioned cases, the tax will be levied at the end of the holding period. This can lead to unpleasant (tax) surprises for the seller.
If the acquisition quotas are observed and the company resells its treasury shares within the legal deadlines, the seller has a tax-free capital gain. No tax consequences arise.
If the company's treasury shares are sold by a legal entity, it will generate a taxable capital gain or loss at the time of sale. The tax is levied on the difference between the sales price and the tax value of the shares. The participation deduction is granted if the requirements are met. If a direct partial liquidation occurs according to the principles above, the acquisition also has withholding tax consequences.
What happens if treasury shares are sold?
If treasury shares are resold, any difference between the sale and acquisition value of the own shares can be accounted for either profit neutral or with an effect on the income. In either case, the difference is taxed as either a taxable gain or expense. If the treasury shares are resold within the legal deadlines, the sale does not lead to capital contribution reserves.
Capital contribution reserves can only be formed if the treasury shares are sold after their purchase was taxed (due to a direct partial liquidation) and the shares are issued or sold at a premium.
From a value-added tax perspective, the sale of treasury shares is treated by the Federal Court as a capital injection, i.e., the sale of treasury shares is not subject to VAT (Art. 18 para. 2 letter e VAT Act). However, VAT paid in connection with the sale of own shares can generally be reclaimed.
How do we account for treasury shares?
Treasury shares are to be listed in the form of a minus item under the liabilities in equity (Art. 959a para. 2 number 3 CO). The minus item must be listed under the usable equity, not under the share capital. The share capital remains unchanged.
How do we determine the purchase price of treasury shares?
The acquisition and resale of treasury shares must generally be at market value or "at arm's length".
If treasury shares are acquired at an inflated price, the difference between the purchase price and the actual market value represents a monetary benefit to the seller that is subject to withholding and income tax.
If a company sells treasury shares to a shareholder or a related third party at too low a price, the difference between the actual market value and the sale price also represents a monetary benefit to the Seller that is subject to withholding and income tax.
What principles should be kept in mind when acquiring own shares?
- When treasury shares are acquired free of charge, there are few legal and tax risks from a civil and tax law perspective. However, a detailed analysis of the circumstances is still advisable.
- When treasury shares are acquired for consideration, it must first be checked whether the company has freely available equity.
- If there is no freely available equity, an acquisition free of charge is recommended. In the case of an acquisition for consideration without usable equity, there are legal risks which need to be examined and evaluated in detail.
- Both the seller and the acquiring company have to consider the tax risks when acquiring treasury shares. The acquisition can be taxed years after the acquisition if the holding periods are not observed.
- An acquisition of treasury shares of less than ten (10) percent of the share capital registered in the commercial register and a resale within six (6) years is generally tax-neutral on the level of the person selling the shares to the company. Any acquisition or sale prices that do not correspond to the third party comparison are reserved.
