Issuer Purchases of Their Own Common Stock in the Open Market
The purpose of this memorandum is to give an outline of the parameters under which a company can purchase its own stock in the open market. This is a summary of the rules, which will provide you guidelines sufficient for most situations. These rules are set forth in Rule 10b-18 of the Securities Exchange Act of 1934, and SEC Release No. 34-48766.
Applicability of RulesRule 10b-18 is promulgated under the Securities Exchange Act of 1934, and thus is only applicable to reporting companies. Rule 10b-18 is also a safe harbor, meaning that reporting companies who follow it are assured that they will not be liable for manipulating their own stock price, however it is not the only method whereby a company can purchase its own securities.
Even if a company is not a reporting issuer, following the safe harbor is clearly the most effective way for the company to avoid liability for manipulating its own stock price. Therefore, we generally recommend that Rule 10b-18 be followed by all public issuers, even those whose stock is traded on the Pink Sheets.
Conditions of Rule 10b-18
The anti-manipulation provisions of section 9(a)(2) or 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 under the Act, will not be deemed to have been violated, if the issuer or an affiliated purchaser of the issuer makes the purchases according to the following conditions:
1. One broker or dealer. Purchases must be effected from or through only one broker or dealer on any single day. If there is more than one affiliated purchaser of the issuer purchasing on a single day, they must all use the same broker or dealer.
2. Time of purchases. The purchases must not be:
a .the opening purchase of the day; or
b. effected during the thirty (30) minutes before the scheduled close of the trading session (this time limit is reduced to ten (10) minutes for issuer’s with an average daily trading volume of $1m or more and a public float of $150 million or more).
3. Price of purchases. The purchase price paid by the company cannot exceed the highest independent bid price, or the last independent transaction price, whichever is higher, quoted at the time the purchase is effected.
This is potentially the most difficult of the conditions to meet. Typically, a buyer will buy at the ask, which is in fact higher than the bid price, while a seller will sell at the bid price. A company buying its own stock cannot buy at the ask price unless that is also the last transaction price, which effectively means that the company cannot buy its own stock if the immediately preceding transaction was a sell transaction by another shareholder. The company cannot support its own stock price in this manner, which is consistent with the intention of Rule 10b-18 to prevent manipulation in the market.
4. Volume of purchases. The total volume of purchases by the company, and any affiliated purchaser, on any single day cannot exceed twenty five percent (25%) of the average daily trading volume. However, once each week, instead of staying under the 25% limitation, the company may effect one block purchase (defined in the Rule) if (i) no other Rule 10b-18 purchases are effected that day, and the block purchase is not included when calculating the four (4) week average daily trading volume.
The Rule goes on to outline certain alternative conditions in the event of market-wide trading suspensions and other exceptions.
Practical Application
An issuer considering the purchase of its own securities should open an account with a brokerage firm that has a clear understanding of, and experience working under, these rules. A copy of these rules should be provided to the brokerage firm, including a copy to its compliance officer, in writing upon the initiation of a stock purchase program.
The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate securities, and employment law matters. Please contact us if you have any questions.
Brian A. Lebrecht is an attorney with and the founder of The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. He can be reached at (801) 983-4948 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it with questions or comments.
Please visit our website at www.thelebrechtgroup.com for further information.
Comments