- SEC Modifies Rule Relating to Issuer Stock Repurchase Safe Harbor
- January 23, 2004
- Law Firm: Blank Rome LLP - Philadelphia Office
In November 2003, the Securities and Exchange Commission (the "SEC") adopted final rules amending the issuer repurchase safe harbor provisions of Rule 10b-18 of the Securities Exchange Act of 1934. Rule 10b-18 provides a safe harbor from potential liability for stock price manipulation in connection with repurchases by or on behalf of an issuer or an affiliated purchaser of an issuer of common equity of the issuer if repurchases on any given day are made in accordance with the manner, timing, price and volume limitations of the rule.
The amendments to the rules revise in certain respects the timing, price and volume limitations on stock repurchases and provide for expanded disclosures of stock repurchases in an issuer's periodic filings with the SEC regardless of whether such purchases were made in accordance with Rule 10b-18. A summary of the amended rule is provided below.
The full text of the release relating to the rule changes, which, except for the expanded disclosure requirements described below, was effective December 17, 2003, is available at www.sec.gov/rules/final/33-8335.htm. Rules applicable to investment companies are effective July 15, 2004, except for expanded disclosure requirements.
Clarification of Single Broker or Dealer Requirement
Although the amended rule does not substantively change the condition which requires an issuer to use a single broker or dealer to bid for or purchase its stock on a given trading day, the amended rule clarifies how this condition applies to issuer repurchases effected through electronic communication networks (ECNs) or other alternative trading systems (ATSs) that are registered as broker-dealers:
- Issuer repurchases can be effected directly through an ECN or ATS.
- Issuers cannot use both an ECN (or other ATS) and a non-ECN broker dealer on any single day.
- If an issuer uses a non-ECN broker dealer to conduct its repurchase activity on a particular day, however, that broker dealer can access ECN liquidity on behalf of the issuer on that day.
The rule also clarifies that the "single broker" requirement only applies to Rule 10b-18 purchases solicited by or on behalf of the issuer. This would permit an issuer to purchase from more than one broker if the issuer does not solicit the transaction.
Modification of Limitations on Timing of Repurchases for Actively Traded Securities
Although the amended rules still prohibit an issuer from effecting a Rule 10b-18 purchase as an opening market transaction in the issuer's security on any given day, the SEC has modified the period of time prior to the scheduled close of a trading market that issuer repurchases of actively traded securities can be made. Under the amended rule, an issuer whose stock has an average daily trading volume (ADTV) for the four calendar weeks prior to the Rule 10b-18 purchase, of $1.0 million or more and a public float of $150 million or more, can make stock repurchases up to 10 minutes before the scheduled close of regular trading in either the principal market where the security is traded or the market where the purchase was effected. The prior prohibition on purchases made during the last 30 minutes of the scheduled market close continues to apply to issuers whose securities have an ADTV of less than $1.0 million or a public float of less than $150 million.
The revised rule now also provided a safe harbor for issuer repurchases made after the closing of regular trading hours but before the end of the period in which last sales price for the subject security are reported in the consolidated system subject to the following restrictions:
- the repurchases comply with the manner, price and volume limitations of Rule 10b-18, except that the issuer may use a different broker or dealer for after-hours repurchases than it used during regular trading hours;
- the price paid for repurchases does not exceed the lower of (i) the closing price of the primary trading session in the principal market for the security and (ii) any lower bid or sales prices subsequently reported in the consolidated system by other markets; and
- an issuer repurchase can not be the opening transaction in the after-hours session.
Uniform Price Condition Applies Regardless of Where the Common Equity is Traded
Rule 10b-18 also specifies the highest price an issuer may bid or pay for its common stock. Unlike the prior rule, under Rule 10b-18, as amended, the same price condition applies regardless of where the common equity is traded. The amended rule now requires that:
- Issuer repurchases may be made at a price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, quoted or reported in the consolidated system.
- Issuers whose securities are not quoted or reported in a consolidated system may purchase at a price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, displayed and disseminated on any national securities exchange or on any inter-dealer quotation system that displays at least two independent priced quotations for the security.
- For all other securities, issuers must effect a purchase at a price no higher than the highest independent bid obtained for three independent dealers.
Block Purchases No Longer Excluded From Trading Volume Limitation.
Under Rule 10b-18, an issuer's repurchases on any single day may not exceed 25% of the ADTV. The amendments require an issuer to include block purchases in calculating the 25% trading volume limitation. However, issuers are generally permitted to include their block purchases in the calculation of the four-week ADTV. A block purchase is a quantity of stock that either has: (i) a purchase price of $200,000 or more; (ii) is at least 5,000 shares and has a purchase price of at least $50,000; or (iii) is at least 20 round lots of the security and totals at least one-tenth of 1% of the outstanding shares of the security that are held by non-affiliates of the issuer. The amendments also established a block purchase alternative pursuant to which once a week an issuer is permitted to make one block purchase in lieu of making purchases under the 25% trading volume limitation for that particular day. In order to qualify for the safe harbor in connection with such a block purchase, no other Rule 10b-18 purchases may be effected that day and the block purchase may not be included when calculating a security's ADTV for purposes of the safe harbor. This block purchase alternative is intended to provide an issuer of a thinly traded stock with flexibility to make a purchase each week that would otherwise exceed the 25% trading volume limitation under Rule 10b-18.
Restrictions on Repurchases Following the Announcement of a Merger or Acquisition
The amendments to Rule 10b-18 provide that the safe harbor is not available for issuer repurchases during the period following the public announcement of a merger or acquisition and ending on the earlier of the completion of the transaction or the completion of the vote by shareholders of the target company will not be eligible for the safe harbor, except as follows:
- if the merger or acquisition or similar transaction is solely for cash and there is no valuation period; or
- where the total volume of Rule 10b-18 purchases on any day does not exceed the lesser of 25% of the security's ADTV or the issuer's average daily Rule 10b-18 repurchases during the three calendar months preceding the announcement of the transaction or from block purchases under Rule 10b-18 that do not exceed the average size and frequency of the issuer's block purchases made during the three calendar months preceding the announcement of the transaction.
The changes to Rule 10b-18 do not affect the separate buyback prohibition during Exchange Act Regulation M restricted periods where a merger constitutes a "distribution."
Amendment of Trading Volume Alternative Following Market-wide Trading Suspensions
In order to facilitate market liquidity, the amendment to Rule 10b-18 increase the amount of common stock an issuer may repurchase in the trading session immediately following a market-wide trading suspension from 25% of the ADTV to 100% of the ADTV.
Expanded Reporting of Stock Repurchases
The SEC also amended the quarterly and annual reporting requirements to require issuers to disclose in a table all common equity security repurchases during the reportable period, whether or not the repurchases were made pursuant to Rule 10b-18. Under the new requirements, issuers are now required to disclose, among other things: (i) the total number of shares (or units) purchased; (ii) the average price paid per share; (iii) the number of shares (or units) purchased as part of a publicly announced plan or program; (iv) the maximum number of shares (or approximate dollar value) that may yet be purchased under the plan or program.1
The new repurchase disclosures are required in quarterly and annual reports for periods ending on or after March 15, 2004. For investment companies, the new disclosure requirements are applicable for fiscal years ending on or after December 15, 2004.
1Disclosure of the principal terms of publicly approved purchase plans and the nature of any purchases made other than pursuant to a publicly announced purchase plan is also required.