United States: Top 10 Practice Tips: Stocks Repurchase Programs

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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