Share cancellations

What difference does it make: share cancellation vs. holding as treasury stock?? Thanks I apologise if this is a silly question… I feel like I should know this!

when you cancel shares, they are not longer float. When you hold as treasury you are long your own stock and can sell at back to market and/or use for ESPP etc… makes a difference for EPS etc.

I suppose you mean holding your OWN stock as treasury stock? I would say there is not really an economic difference (in terms of valorization). Maybe will the accounting treatment play a role: treasury stock are accounted for as Available For Sale stocks (Trading Securities) => you have to recognize realised and unrealised gains in net income, recognize their MtM value in assets and thus EQY, etc. If you cancel them, this MtM recognition will only happen once. Besides, the process of holding as AFS your stocks provides you with more flexibility. Share cancellation should be approved in annual meeting or stuff like that. Hope this helps.

My question / hesitation was down to having read something to the effect that holding shares as Treasury stock does NOT reduce the number of shares outstanding (i.e. would not boost EPS). This does not square with how I model things. I also could not work out if this meant companies would pay themselves a dividend (which I do not model). Turns out the way I model things is not incorrect, as per the following. "As a corporation cannot be its own shareholder, any shares purchased by the corporation are not considered assets of the corporation. Assuming the corporation plans to re-issue the shares in the future, the shares are held in treasury and reported as a reduction in stockholders’ equity in the balance sheet. Shares of treasury stock do not have the right to vote, receive dividends, or receive a liquidation value. " Thus, cancellation vs. treasury would make no difference to EPS. I would infer MtM is a red herring (“not considered assets of the corporation”). And the reason to cancel would be to a) signal that the firm will not re-issue and b) comply with rules governing max amount of treasury stock permissible (e.g. 5% in Switzerland or whatever).

There is also tax implications…treasury stocks would be presumably acquired on the open market. If the shares are redeemed and cancelled there is Paid Up Capital and deemed divend considerations that make the shareholder liable for excess over PUC as fully taxable vs. the 50% capital gain inclusion, in Canada anyhow.

Etienne that’s correct. One fundamental accouting principal is that changes in market price of stock cannot affect the firm’s i/s. (Historical trivia: I believe what tipped off the Enron whistleblower was, at least in part, that the firm’s income rose with rising share price.) And EPS is always outstanding shares (possibly diluted), never taking into account treasury shares.