Treasury shares are shares of stock that a corporation does not make available for purchase by the public. Instead, the corporation holds on to the stock in its own treasury. By keeping a percentage of its total outstanding debt off of the market, the corporation protects the equity position of current ownership and provides a back-up funding option in case the corporation needs to raise additional funds in the future.
When a company incorporates, the owners must indicate the number of shares of stock the corporation will be allowed to issue. Selling shares of stock is the way a corporation raises money for operations. Whomever owns the shares of stock owns the company. A stockholder's ownership percentage is the number of shares he owns divided by the total number of outstanding shares.
Once a corporation authorizes the issuance of a certain amount of stock, it is not necessarily obligated to sell all of it to the public. It can hold some of it back from the market and keep it in the corporation's treasury. The corporation can also buy back shares from the public, effectively removing shares from the market. Once these shares are sitting in the corporate treasury, they are considered unissued capital of the corporation.
Since these treasury shares are no longer being traded on the open market, they lose some of the rights that public shares enjoy. These shares receive no dividends and do not have voting rights. They are not included in the calculation of shares outstanding. It is as if these shares are retired and are not a factor until the corporation decides to put the shares back on the market.
A corporation can decide to issue or reissue treasury shares if it needs to raise money. The shares act as an insurance policy in case of a downturn. Another important use is to ward off a hostile takeover. If a undesirable party is buying up shares of the corporation on the open market in an attempt to corner enough of a percentage of ownership to drive the selection of management, treasury shares can be used to change the number of outstanding shares in favor of the current management.
Certain jurisdictions regulate the corporate use of treasury shares. In the U.S., for instance, some states do not allow corporations to hold treasury shares at all. In other states and in countries such as the U.K., the law puts a cap on the number of shares a corporation can hold in its treasury that is based on the corporation's total number of shares outstanding.