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Stock Buybacks – Securities – United States

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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 S-K 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

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.

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