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. In addition, 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.

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 (the 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 after-hours trading session from the repurchase agent used during regular trading hours. The company may make repurchases if these 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 closed 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 fourweek 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.

    Failure to meet any of the four conditions will render the safe harbor unavailable for repurchases that day. Certain types of repurchases are not covered by Rule 10b-18 due to the heightened risk of manipulation, such as repurchases made by or for an employee benefit plan by an independent agent or repurchases made in connection with a merger or a tender offer.

    Repurchases by an affiliated purchaser may be attributable to the company under Rule 10b-18 if the affiliate controls the company's Rule 10b-18 purchases or the affiliate and the company are under common control. Repurchases made by persons (even if unaffiliated) acting in concert with the company for the purpose of acquiring the company's outstanding shares will also be attributed to the company. All purchases made by such persons will be aggregated with the company's direct purchases to determine compliance with the Rule 10b-18 safe harbor. This is an important consideration for a financial institution that has an affiliated broker-dealer that is consummating repurchases on behalf of the institution.

    In addition to the federal securities laws, counsel should consider whether a proposed repurchase program complies with applicable state law. For a Delaware corporation, Section 160 (8 Del. C. § 160) of the Delaware General Corporation Law allows a company to repurchase or redeem its outstanding securities from shareholders so long as its capital is not and would not become impaired. A determination by the company's board of directors is typically sufficient. The board of directors must also consider whether the proposed repurchase program, if fully implemented, would cause the company to become insolvent.

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 the repurchases. 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.

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