Top 10 Practice Tips: Stocks Repurchase Programs – Corporate/Commercial Law & More News Here – Upjobsnews

This practice note includes 10 practice tips that may help you,
as counsel to a public company or a repurchase agent, in
implementing a stock repurchase program on behalf of your client. A
stock repurchase program enables a company to buy back a certain
number of its outstanding securities. In recent years, the
repurchase activity undertaken by U.S. public companies has
significantly increased, in part as a result of the tax reforms
implemented in 2018. When considering adoption of a share
repurchase program, companies should consider the sharp public
criticism of such programs, which has become more
heightened immediately after the commencement of the COVID-19
pandemic. Nonetheless, share repurchase activity increased
substantially in 2021. Many companies that have completed recent
significant strategic transactions have concurrently undertaken
sizeable share repurchases. Shares repurchased by a company are
either canceled or kept as treasury stock, which thereby reduces
the number of outstanding shares and usually has the effect of
increasing the company’s earnings per share.

For additional information on stock repurchase programs, see Share Repurchase Programs and Dividends, Redemptions, and Stock
Repurchases.

1. Understand applicable legal requirements. Rule
   10b-18 (17 C.F.R.§ 240.10b-18), which was adopted in 1982 and
   amended in 2003, provides public companies with a voluntary,
   nonexclusive safe harbor from liability for manipulation under
   Sections 9(a)(2) and 10(b) of the Securities Exchange Act of 1934,
   as amended (Exchange Act), and Rule 10b-5 (17 C.F.R.§
   240.10b-5) under the Exchange Act when the company bids for or
   purchases shares of its common stock in accordance with the
   Rule’s manner, timing, price, and volume conditions. As a
   result, most repurchases of common stock in the open market are
   made in reliance on the Rule 10b-18 safe harbor in order to avoid
   manipulations claims. The safe harbor does not immunize the company
   and its insiders from making repurchases at a time when they are in
   possession of material nonpublic information. The Rule 10b-18 safe
   harbor is only available for repurchases of common stock (or the
   equivalent) and is not available, for example, in connection with
   repurchases of preferred stock, warrants, or convertible debt
   securities (or other nonvoting securities). Nonetheless, many
   companies implement a repurchase program for equity-linked
   securities subject to conditions analogous to those set forth in
   Rule 10b-18.

To come within the safe harbor, a company’s repurchases must
satisfy (on a daily basis) each of the rule’s four conditions
(manner of purchase, timing, price, and volume) summarized
below:

• Manner of purchase condition. Open-market
  repurchases may be undertaken by the company directly or by a
  repurchase agent (a broker-dealer) on the company’s behalf.
  However, pursuant to the manner of purchase condition, the company
  is only permitted to engage one repurchase agent per day to bid for
  or purchase its common stock. Nonetheless, a company may use a
  different repurchase agent during an afterhours trading session
  from the repurchase agent used during regular trading hours. The
  company may make repurchases if these repurchases are not solicited
  by or on behalf of the company or its repurchase agent (such as
  following a shareholder reverse inquiry).




• Timing condition. The company’s repurchase
  may not be the opening transaction on its principal trading market.
  The company may not conduct the repurchase during the 10 minutes
  before the scheduled close of the primary trading session in the
  principal market for its common stock or the last 10 minutes before
  the scheduled close of the primary trading session in the market
  where the repurchase is effected. These 10-minute restrictions are
  extended to 30 minutes if shares of the company’s common stock
  do not have an average daily trading volume (“ADTV”) of
  at least $1 million and a public float of at least $150 million.
  Under certain circumstances, a repurchase can be effected by the
  company or its repurchase agent following the close of the primary
  trading session in the principal market.




• Price condition. Repurchases of listed shares
  must be made at a price per share not exceeding the highest
  independent bid or last transaction price, whichever is higher. For
  shares that are not listed, the company must use the highest
  independent bid obtained from three independent dealers. The offer
  price is irrelevant for purposes of determining the maximum
  permissible price.




• Volume condition. Daily repurchases may not
  exceed 25% of the ADTV during the preceding four weeks (as a
  result, a new public company must wait at least four weeks after
  its shares begin trading in order to claim the safe harbor).
  However, a company may include its block-size purchases when
  calculating its four-week ADTV. Rule 10b-18 provides companies with
  a choice when making any particular block purchase. Either the
  block purchase must comply with the 25% ADTV volume condition, like
  any other repurchase, or the block purchase need not comply with
  the volume condition, but the company can make no other repurchases
  on that day, and all other block purchases effected during that
  week must comply with the 25% volume condition.

2. Consider repurchase authority. Any purchase of
   a company’s securities, including a repurchase program, must be
   approved by the company’s board of directors. The authorization
   should include an affirmation of the repurchase program’s
   intended objective and a determination that the program is in the
   best interest of the company and its shareholders. In order to
   arrive at this conclusion, the board of directors should assess the
   company’s capital position. The board of directors should also
   consider the repurchase alternatives available to the company and
   the impact of the repurchase program on the company. The company
   should identify any provisions in its organizational documents or
   contractual agreements that limit its ability to repurchase its
   securities and obtain any required third-party consents prior to
   undertaking any repurchase. As part of this repurchase
   authorization, the board of directors should impose specific
   parameters with respect to the timing, dollar amount, and/or share
   size of any repurchases that are to be conducted. Generally, the
   board of directors should consider how repurchases will be
   monitored and reported. For a form of board resolutions that can be
   used by a company seeking to repurchase outstanding company
   securities pursuant to a stock repurchase plan, see Board
   Resolutions: Stock Repurchase Plan Approval.




3. Consider potential repurchase structures.
   Companies have significant flexibility with respect to choosing a
   particular repurchase structure ranging from open market
   repurchases to repurchases that are subject to tender offer rules.
   A company may structure its repurchase as an accelerated stock
   repurchase (ASR). An ASR may result in faster execution and more
   price certainty; however, repurchases made pursuant to an ASR do
   not benefit from the Rule 10b-18 safe harbor. An ASR is a privately
   negotiated transaction, usually documented as a forward contract,
   in which a repurchase agent agrees to sell a predefined amount of
   stock to a company at a price per share based on the
   volume-weighted average price during the specified period. A
   repurchase agent acts as the seller of the company’s shares in
   an ASR, and the company acts as the purchaser buying back its own
   shares. ASRs provide numerous benefits, including transaction
   efficiency, an immediate share count reduction, certainty as to the
   timing and quantity of the repurchase, and possible accounting
   advantages. Notwithstanding these benefits, ASRs have been the
   subject of some criticisms. As a result, a company should consider
   carefully its alternatives.




4. Understand how an ASR works. At the beginning
   of the ASR, the company generally pays a predefined dollar amount
   to the repurchase agent for a specified number of securities. The
   repurchase agent generally borrows securities from stock lenders
   and delivers those securities to the company. Over time, the
   repurchase agent will buy securities in the market to cover its
   borrow and has the option to complete the ASR at any time within a
   pre-agreed period. The purchase period will have fixed starting and
   end points, though the repurchase agent will have the right, upon
   notice to the company, to shorten the period. An average price is
   determined for the purchase period, which is typically based on the
   Rule 10b-18 pricing condition minus an agreed discount or price
   adjustment. At the ASR’s final settlement, the total number of
   securities purchased by the company generally equals the ASR dollar
   size divided by the discounted average price. If the repurchase
   agent did not deliver a sufficient number of securities at
   inception, it must deliver incremental securities to the company at
   the end of the term. Conversely, if the repurchase agent delivered
   too many securities, the company must settle with the repurchase
   agent in cash or stock on the settlement date.




5. Understand disclosure obligations. Public
   companies must announce repurchase programs and report their
   repurchase activity in accordance with Item 703 (17 C.F.R.§
   229.703) of Regulation S-K. The securities exchange on which the
   company’s securities are listed will require public disclosure
   if the company’s board of directors authorizes a repurchase
   program. The company may satisfy these public disclosure
   requirements by filing a Current Report on Form 8-K under Item
   7.01. The filing must disclose the authorization date, the number
   of shares that were authorized to be repurchased, and the
   expiration date of the program, if any. Going forward, the company
   will also be required to disclose repurchases in its Exchange Act
   filings, including the total number of shares purchased, the
   average price paid per share, the total number of shares purchased
   as part of the repurchase program, and the maximum number of shares
   yet be purchased under the repurchase authority. For additional
   information regarding the disclosure requirements of Form 8-K, see
   Form 8-K Drafting and Filing.




6. Consider potential impact on upcoming issuances of
   securities. A company should generally avoid purchasing
   its outstanding securities at any time that its insiders
   (directors, officers, and affiliated shareholders) are selling the
   company’s securities other than through a Rule 10b5-1 program
   as described below. Similarly, insiders should consider and discuss
   with the company and counsel whether it is prudent to sell the
   company’s securities they hold when the company is purchasing
   its securities. The company also will want to consider the
   applicability of Regulation M to the extent that the company is
   engaged in activity that would be considered a distribution under
   the Regulation and the company has an active repurchase program.
   Repurchase agreements typically include provisions to the effect
   that the company is not engaged in any issuance of securities that
   would cause the repurchase agent to violate any securities law and
   that at all relevant times during the repurchase program the
   company will not make any such issuance of securities. The
   representations and covenants in the repurchase agreement generally
   place the burden on the company to monitor its activities during
   the term of the repurchase program.




7. Address insider transaction concerns.
   Repurchase programs have recently been at the center of some
   controversy, and there have been calls by members of Congress to
   rescind or significantly amend Rule 10b-18, as well as to address
   insider transactions in proximity to announced repurchases. In
   March 2020, nowPresident Joe Biden tweeted: “I am calling on
   every CEO in America to publicly commit now to not buying back
   their company’s stock over the course of the next year. As
   workers face the physical and economic consequences of the
   coronavirus, our corporate leaders cannot cede responsibility for
   their employees.” Although no new laws have been passed
   limiting a public company to repurchase their own shares, it has
   become the subject of intense political debate and Congress is
   currently considering imposing a federal tax on repurchase
   activity. Critics of repurchase programs argue that they primarily
   benefit the company’s senior management and that the cash used
   for repurchases should instead be used to grow the company’s
   business or increase the wages of the company’s employees. As a
   result of the heightened scrutiny, a company’s management and
   board of directors should consider closely the types of concerns
   that may be raised. The company also can consider establishing a
   Rule 10b5-1 trading plan for a repurchase agent to buy its
   securities at a time when the company is not aware of any material
   nonpublic information. For example, Andeavor LLC, a U.S refiner,
   recently agreed to pay $20 million in penalties to the SEC for
   inadequate controls over a stock buyback plan. Andeavor’s
   internal accounting controls failed to ensure that the buyback
   adhered to a company policy prohibiting repurchases while it held
   material non-public information. The company would provide the
   repurchase agent with specific timing and size parameters for
   buying its securities at the outset of the program, and the
   repurchase agent would thereafter consummate repurchases on the
   company’s behalf. The company would not have any subsequent
   influence over how, when, or whether the repurchase agent effects
   purchases of securities. For further information on Rule 10b5-1
   plans, see Rule 10b5-1 Plans.

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