Share Buybacks - Overview
Security buybacks are becoming increasingly popular by issuers of both equity and debt securities. Internationally, S&P 500 companies share buybacks amounted to nearly $1 trillion in 2024, and this figure is steadily rising with increasing overarching interest for such programmes on the rise globally. At a national level, the Malta International Airport has recently declared its intention to issue such a share buyback programme as well and it is expected thus such programmes will grow in the near future.
Security buybacks are carried out for several reasons. First and foremost, a share buyback can be used to strengthen the share price of the company on the international market, by reducing supply. Such reduction in shares on the open market would naturally increase shareholder value as typically such programmes would result in an increase in share price. Secondly, buyback programmes can be used to reward employees of the company or group, by giving these individuals an opportunity to buy into the company they work with as an additional form of remuneration.
A buyback programme allows the company to acquire back its own shares, thus giving them to its employees instead of issuing new shares. Furthermore, a share buyback programme can also provide investors with an exit for their investment, especially if the security of the corporate entity is rather illiquid and hard to sell on the market or OTC. Share buybacks have also been commonly utilised to reduce the cash reserves of the company in instances when the latter has overwhelmingly large cash reserves which need to be reduced.
Nevertheless, carrying out a share buyback programme must be done with caution, to ensure that the issues are not breaching market abuse rules, which can lead to significant regulatory implications. Such abuse can also lead to exposure for the Directors of the corporate entity due to potential breaches of their fiduciary duties, especially if the Directors themselves stand to gain from increased prices for the marketable security, when they themselves are invested in the company directly.
From a procedurale perspective, the company must also ensure that any required formalities as required by law are also adhered to. Such formalities would typically relate to standard legal requirements emanating from the law, which in Malta's case is the Companies Act (Ch 386 of the Laws of Malta) as well as regulatory requirements which would be imposed by the governing regulatory authority, which locally would be the Malta Financial Services Authority (MFSA) and the Malta Stock Exchange.
Considerations under the Market Abuse Regulation
When carrying out a share buyback programme, the issuer must ensure that they do not breach the relevant market abuse provisions under the Market Abuse Regulation (596/2014) (MAR). Specifically, Article 5 of the MAR stipulates that if certain conditions are met in a share buyback programme, a 'safe harbor' protection is granted to the issuer and hence, the issuer will be automatically deemed not to be in violation of Articles 14 and 15 of the MAR.
However, non-adherence to the 'safe harbor' provisions does not automatically mean that the issuer was in breach of Articles 14 or 15, but more care must be taken to ensure that breaches of such rules have not taken place. Indeed, in a circular published by the MFSA in 2022, the national Authority noted that local issuers did not in fact avail of the 'safe harbor' provisions under Article 5 and chose to issue a securities buyback without making use of the exception under the aforementioned Article.
In order for an issuer to make use of the exception as stipulated under Article 5, the sole purpose of the share buyback programme must be to:
- Reduce the capital of an issuer;
- Meet obligations arising from debt financial instruments that are exchangeable into equity instruments; or
- Meet obligations arising from share option programmes, or other allocations of shares, to employees or to members of the administrative, management or supervisory bodies of the issuer or of an associate company.
The issuer must also adhere to several notification and transparency requirements for the share buyback to fall under the safety of the 'safe harbor' provisions, although these have been slightly relaxed in the latest update to the MAR. In addition, in order to benefit from the 'safe harbor' provisions, the trades must take place on the open market. OTC transactions are not covered under this exception, which is a very important caveat since several trades happen OTC.
Share Buybacks and Conflicts of Interest
One specific issue that often arises with share buybacks is potential conflict of interest between the selling shareholders and the non-selling shareholders, especially in situations where the non-selling shareholders would be PDMRs. It is a common occurance that the management and the Board of Directors of listed entities would have significant personal interests and investment in listed companies, and hence a share buyback programme may affect the price of listed securities which would directly benefit these executives holding such equity interest. In such cases, it is especially crucial for the company undertaking the share buyback to utilise the 'safe harbur' provisions to ensure that no violations of Articles 14 and 15 of the MAR occur.
This conflict of interest is also notable due to the discrepancy of information between the general public who hold securities in the entity and the senior management shareholders, as even if all transparency and notification requirements are appropriately adhered to, such individuals have a significant advantage over the general public due to inside knowledge of the company's current and future dealings. While the transparency obligations on PDMRs and the 'safe harbor' disclosure requirements may give the public a general indication of potential activity in a listed company in the short term, such as in the event of an impending share buyback, such information can tend to be speculative at best.
While it is true that the disclosure requirements under the MAR should considerably reduce the information discrepancy between external investors and insiders, the knowledge-related disadvantage is always a reality, and such share buybacks have the potential to heavily benefit insiders. This could also pose legal challenges on the Directors of the company who are duty bound to always act in the best interest of the company. It may be argued that it is very difficult for these Directors to exercise their fiduciary duties when they stand to gain significantly in buyback programmes even when all legal and regulatory requirements are adhered to.
Local Considerations to Share Buybacks
In Malta, buyback programmes were overwhelmingly applied to debt securities with only a few buyback programmes related to equity securities in local listed entities. Consequently, these buybacks would fall outside the scope of the 'safe harbor' provisions under the MAR. While this does not imply that such transactions were in breach of Articles 14 and 15 of MAR, each one of these transactions would need to be analysed individually to ensure that no violations occurred.
One specific consideration related to the local market is that buybacks give the opportunity to investors to exit properly and at a fair price. This is due to the fact that the local market is highly illiquid and hence exits from larger investments tend to be more difficult. In addition, due to the low liquidity of the market, prices of equity securities tend to be slow to react to positive market indications such as increased profitability of the issuer and share buybacks could reduce the availably of the relevant security on the market and increase price sensitivity of the relevant security to the benefit of its investors.
Recently, the Malta Stock Exchange announced several measures to boost local liquidity and market confidence, one of which being a measure to assist companies to assess whether a buyback programme can add value to the issuing entity.
To Conclude
Current market trends project that share buybacks will continue to increase as such programmes have show to be increasingly popular for both the issuers and investors. However, regulatory challenges will continue to persist to ensure that the interests of the external investor, the issuer and the internal investor are balanced which will continue to prove to be extremely challenging.
Locally, the local illiquid market could very well benefit from these programmes as well, however the potential market abuse implications are even larger in Malta when a significant portion of issuers would still have most of its management body having some or a significant interest in the issuer. If share buybacks are not done properly, it could easily erode investor confidence in the local market which in turn would make it even more illiquid. The issuer must take proper action to ensure that such issues are hence in line with all transparency obligations, and the regulators must keep their eye on the ball to prevent potential abuse in the interest of the local market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
