Treasury stock is any shares issued by a corporation that have been repurchased by the company and are currently not offered for sale to investors. The stock is not considered to be outstanding, although the shares remain active and may be resold by the corporation at some future date. There is no time limit on how long a company may hold on to treasury stock.
While the stock is in the possession of the issuer, the shares do not provide the same benefits as the shares that are held by various investors. Treasury stock does not carry voting privileges, nor will the stock provide any type of dividends or earnings per share. In the event that the corporation chooses to offer the shares for sale, the stock would regain both voting rights and be subject to the issuance of dividend payments to the shareholder.
A company may choose to collect treasury stock for several reasons. Repurchasing issued shares of stock is often a way to counter a takeover attempt. By re-acquiring enough shares of issued stock, the company can effectively prevent a corporate raider from buying enough shares to initiate a takeover bid. If successful in preventing the hostile takeover, the company may be able to purchase any shares in the control of the raider and then begin to reissue the shares to other investors.
Another common application of treasury stock is to provide a foundation for stock option programs for executives and other employees of the company. In the case of an Employee Stock Option Plan (ESOP), shares of one class of stock may be repurchased and converted into another class in order to comply with the terms of the plan. Once converted, the shares are no longer considered treasury stock, and carry any privileges specified by the structure of the ESOP.
At its discretion, a company may choose to hold onto treasury stock for an indefinite period of time. While in the possession of the corporation, the stock is stored in the treasury of the company. The company can also elect to cancel or retire the shares, if this is determined to be in the best interests of the corporation. Any action that releases the shares of stock from the company treasury change the status of the shares. This means shares that are retired or reissued for purchase are no longer considered treasury stock.