Given the volatility in the markets, numerous public companies are considering repurchasing shares as a means of improving the market price of a company’s stock. Historically, a company’s stock price increases from 1-3% when repurchases are announced and generally this price increase does not dissipate over time. See, for example, this SEC 2020 study at page 39. Set forth below is a brief overview of various considerations with respect to conducting an open market stock repurchase.
Board approval – The Company’s board of directors should approve the repurchase program, which should include approval of either the maximum number of shares (or percentage of outstanding shares), or a maximum dollar amount of shares to be repurchased, and the intended method of repurchase, including any price or time limitations. The board should consider, among other factors, the impact of the repurchase on the Company’s cash reserves, the Company’s capital needs, and whether there is a better alternative use of the Company’s cash, such as reinvesting in the Company. Consideration of factors such as these may help the board demonstrate that it properly considered the shareholders’ best interest and establish that it properly discharged its fiduciary duties.
Public announcement – Once approved by the board, the Company should publicly announce the repurchase plan with enough time for the market to absorb the announcement prior to making repurchases. A public announcement will help mitigate the potential for insider trading in connection with a share repurchase program. The announcement needs to be made by means of a press release and is typically also announced via Form 8-K. While the extent of disclosure will depend on the facts specific to the share repurchase program, at a minimum the Company should disclose the duration of the program, the maximum number of shares proposed to be repurchased or the maximum dollar amount of shares, the objective of the repurchase program, any plan relating to the disposition of the shares to be purchased, and how the purchases will be made.
Rule 10b-18 safe harbor – Share repurchases are typically made in accordance with the conditions set forth in Rule 10b-18. The Rule provides a safe harbor from market manipulation under Sections 9 (a) (2) and 10 (b), and Rule 10b-5 under the Exchange Act. A company considering repurchasing its shares is not required to adhere to the Rule 10b-18 conditions, nor is Rule 10b-18 the exclusive means for companies to avoid potential liability for manipulation when making repurchases. Rule 10b-18 provides an issuer (and its affiliated purchasers) with a nonexclusive safe harbor solely by reason of the manner, timing, volume, and price of the repurchases. Affiliated purchasers include affiliates who, directly or indirectly, control the Company’s purchases, whose purchases are controlled by the issuer, or are under common control with the issuer’s purchases. This could include the CEO, CFO and members of the board of directors. The safe harbor applies on a daily basis; therefore a failure to meet any one of the four conditions will remove all of the Company’s repurchases from the safe harbor for that day. To qualify for the safe harbor, the Company (and its affiliated purchasers) must satisfy, on a daily basis, the following conditions:
(1) Manner (one broker or dealer). All purchases must be effected from or through only one broker or dealer on any single day. Major brokerage firms are familiar with the Rule 10b-18 requirements and implement programs accordingly.
(2) Timing. The purchases must not be the opening transaction. In addition, the purchases must not be effected during the 10 minutes before the scheduled close of the primary trading session. Companies whose securities have an average daily trading volume (“ADTV”) of less than $ 1 million or a public float value of less than $ 150 million may not make purchases during the 30 minutes before the scheduled close of the primary trading session.
(3) Volume. The aggregate purchases on any given day must not exceed 25 percent of the security’s ADTV. The rule provides a limited exception for “block” trades, and allows a company to make one block purchase per week in lieu of purchasing under the 25 percent of ADTV limit for that day, as long as the company does not make any other Rule 10b -18 purchases on that day. Purchases made pursuant to this block trade exception will not be included in computing a security’s ADTV for purposes of the volume limit.
(4) Price. Purchases under Rule 10b-18 must not be made at a price that exceeds the highest independent bid or the last independent transaction price (whichever is higher).
Rule 10b-5 restrictions apply
Even if the Company’s purchases satisfy the Rule 10b-18 conditions, the rule does not provide protection from potential liability under Rule 10b-5 if the purchases were made while in possession of material, non-public information that could affect the value of its securities. . As a result, repurchase programs require careful, ongoing review by an officer familiar with both corporate developments and the Company’s prior disclosures. If the Company comes into possession of material, non-public information after the launch of the repurchase program, the Company should suspend the repurchase until the information is made public and absorbed by the market, or goes stale. A company cannot implement a share repurchase program when it is in possession of material non-public information.
Many stock repurchase programs are structured to take advantage of the safe harbor in Rule 10b5-1. A company may seek to establish a trading plan under Rule 10b5-1 which provides a safe harbor from the Rule 10b-5 anti-fraud and anti-manipulation provisions if the plan specifies a formula that governs the amounts, prices and dates of repurchases. Repurchases under a Rule 10b5-1 plan still must comply with the other anti-fraud and anti-manipulation rules. For example, Regulation M prohibits bids or purchases by or on behalf of the Company if it is engaged in a “distribution” of the same securities (or securities for which those securities may be exchanged, exercised or converted). If the company intends to undertake a distribution of securities, it will typically need to suspend an ongoing repurchase program.
Disclosure of purchases
The Company must disclose its repurchases in its next periodic report for each month of the preceding fiscal quarter. Item 703 of Regulation SK requires tabular disclosure about the purchases, including, the total number of shares purchased, average price paid per share, total number of shares purchased as part of a publicly announced repurchase plan, and the maximum number of shares (or approximate) dollar value) of shares that may still be purchased under publicly announced plans or programs. The SEC proposed rules in December 2021 that, if adopted, would require daily (rather than monthly) disclosure of purchases, one business day after the execution of the Company’s share repurchase order, and new disclosures including the total number of shares purchased in reliance on the Rule 10b-18 safe harbor. For a more complete summary of these proposed rules and considerations for companies to think about now, refer to our client alert.
Purchases not protected under Rule 10b-18
Purchases that are made in technical compliance with the rule, but are made as part of a plan or scheme to evade the federal securities laws are not protected. The safe harbor also does not apply to certain types of repurchases, including purchases made in a tender offer, purchases effected by or for an employee plan by an agent independent of the issuer, purchases of fractional security interests, or purchases made during the period from the public announcement of a merger, acquisition or similar transaction, until the earlier of the completion of such transaction or the completion of the vote by the target company’s stockhold
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