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REGULATION
OF
STOCK REPURCHASE PROGRAMS
UNDER
THE FEDERAL SECURITIES LAWS
Many public companies employ stock repurchase programs to increase shareholder value
at times when their outstanding securities are perceived to be underpriced or to minimize the
dilution caused by the use of stock in acquisitions or for employee plans. Issuers must design
repurchase programs to comply with a number of potentially applicable provisions contained in
the federal securities laws. The purpose of this memorandum is to outline these provisions very
briefly and to serve as a basis for additional discussions with legal counsel.
In addition to the federal securities law provisions discussed in this memorandum,
applicable state corporate and securities laws and the issuer’s own charter documents and
contractual arrangements (including, for example, bank credit facilities) must be reviewed before
beginning any stock repurchase program to determine additional restrictions. Stock repurchases
are often treated as the equivalent of dividend distributions under state corporate laws, charter
provisions and loan and other financing agreements which restrict dividend distributions. Stock
repurchase programs may also raise important accounting issues, and consequently, issuers
should consult their public accountants as well as their legal counsel before beginning a stock
repurchase program.
In recent years, issuers and investment bankers have developed and implemented a
variety of techniques to accelerate buy-backs or hedge market risk during repurchase programs.
The special legal issues posed under federal securities laws by accelerated stock buy-back
transactions or by use of puts, calls, costless equity collars or comparable devices are beyond the
scope of this general memorandum.
Market Manipulation Safe Harbor: Rule 10b-18
Stock purchases by an issuer and its affiliates are subject to the anti-manipulation
provisions of Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934. These
provisions make it unlawful (1) to manip ulate prices of a security by creating actual or apparent
trading in such security or by raising or depressing the price of such security, and (2) to use any
manipulative or deceptive device or contrivance in contravention of SEC rules in connection
with the purchase or sale of any security.
Rule 10b-18 under the Exchange Act provides a nonexclusive safe harbor from the
provisions of Sections 9(a)(2) and 10(b) for open market bids and purchases of stock by issuers
and persons considered to be “affiliated purchasers” insofar as such bids or purchases might be
deemed unlawfully manipulative solely by reason of their time, price or amount or the number of
brokers or dealers used. An “affiliated purchaser” under Rule 10b-18 is a person acting in
concert with the issuer for the purpose of acquiring the issuer’s securities, or is an affiliate that,
directly or indirectly, controls the issuer’s purchases, or whose purchases are controlled by, or
under common control with, those of the issuer. This definition will normally cover a parent
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company of the issuer as well as officers and directors having responsibility for the issuer’s
purchases.
Rule 10b-18 does not apply to tender offers, purchases by an employee benefit plan
effected by an independent agent and certain other purchases. The rule is not a safe harbor from
violations of Rule 102 of Regulation M under the Exchange Act (which restricts purchases of
securities that are the subject of a distribution) or violations of Section 10(b) and Rule 10b-5 that
entail conduct other than manipulation solely by reason of the time, price or amount of
repurchases or the number of brokers or dealers used. For example, if an issuer or affiliated
purchaser engages in repurchases while aware of material nonpublic information of a favorable
nature there may be a violation of Section 10(b) and Rule 10b-5, notwithstanding compliance
with Rule 10b-18.
In order to take advantage of the safe harbor provided by Rule 10b-18, an issuer and its
affiliated purchasers must comply with all of the conditions of the rule:
· One Broker or Dealer Per Day. All Rule 10b-18 bids or purchases on behalf of the
issuer or any affiliated purchaser must be made from or through a single broker or
dealer on any single day. All such bids or purchases made on behalf of more than one
affiliated purchaser, or the issuer and one or more affiliated purchasers, on a single
day, must similarly be made from or through a single broker or dealer.
Because of the complexity of complying with Rule 10b-18, issuers and affiliated
purchasers contemplating a market repurchase program normally make prior
arrangements with one broker or dealer having extensive experience in such programs
to carry out the entire program on their behalf.
· Timing of Purchase. If the security is traded on a national exchange or the Nasdaq
National Market, the purchase must not constitute the day’s opening transaction for
the security. Such a security also may not be purchased during the last half hour of
scheduled trading on the exchange that is its principal market or on which the
purchase is actually made or during the last half hour before termination of the period
in which last sale prices are reported on the Nasdaq National Market.
For a Nasdaq security (other than a Nasdaq National Market security), purchases may
be made only if there exists a current independent bid for the security as reported in
Level 2 of Nasdaq.
To help improve liquidity immediately following a market-wide trading suspension,
the safe harbor is available without compliance with these timing restrictions either
(a) from the reopening of trading until the scheduled close of trading on the same day
as the suspension or (b) at the opening of trading on the next trading day if the market
did not reopen on the day of the suspension.
For an over-the-counter security not reported on Nasdaq, Rule 10b-18 does not
impose any timing restrictions.
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· Price of Purchase. If the security is traded on a national exchange or the Nasdaq
National Market, the price at which an issuer or affiliate may purchase or bid on
securities through a broker or dealer must not exceed the higher of the current
independent bid quotation or the last independent sale price of the security.
Bids and purchases of a Nasdaq security (other than a Nasdaq National Market
security) may only be made through a broker or dealer at a price that does not exceed
the lowest current independent offer quotation reported in Level 2 of Nasdaq.
For an over-the-counter security not reported on Nasdaq, bids and purchases may not
be made through a broker or dealer at a price that is higher than the lowest current
independent offer quotation determined on the basis of reasonable inquiry.
For purposes of Rule 10b-18, the “purchase price” of a security excludes
commissions and any commissio n equivalent, mark-up or differential paid to a dealer
if the security is traded on a national exchange or the Nasdaq National Market. For a
Nasdaq security (other than a Nasdaq National Market security) or an over-thecounter
security not reported on Nasdaq, “purchase price” excludes commissions but
includes any commission equivalent, mark- up or differential paid to a dealer.
· Volume of Purchases. If the security is traded on a national exchange or the Nasdaq
National Market or otherwise quoted on Nasdaq, the issuer and its affiliated
purchasers are permitted to make daily purchases of up to 25% of the average daily
trading volume of the security for the four calendar weeks preceding the Rule 10b-18
purchase. “Block purchases” (as defined in the rule) and private transactions not
effected through a broker or dealer are not required to be included in computing the
25% daily volume limitation.
With regard to over-the-counter securities not reported on Nasdaq, daily purchases
may be made of up to one round lo t (100 shares or other customary unit of trading for
a security) or an amount which, when added to Rule 10b-18 purchases made during
the preceding five business days by the issuer and affiliated purchasers, does not
exceed 1/20th of 1% of all outstanding shares owned by nonaffiliates of the issuer,
plus unlimited block purchases and private transactions not effected through a broker
or dealer.
Complying with the Rule 10b-18 conditions requires an issuer to identify all its affiliated
purchasers and coordinate all their open market bids and purchases with its own. The conditions
of Rule 10b-18 are complex, and the rule itself, rather than these summaries, should be consulted
