In October 2006, I wrote an article outlining the parameters under which a company can purchase its own stock in the open market. That article can be read here.
On January 25, 2010, the Securities and Exchange Commission proposed amendments to Rule 10b-18. The SEC’s Proposing Release can be read here. The intent of the amendments is to update the rule responsive to modern market developments. As of the date of this article, the Proposal is open for public comment, and comments can be read here. The comment period is scheduled to end on March 1, 2010.
There are four basic conditions that must be satisfied in order for an issuer to repurchase its own stock pursuant to the safe harbor of Rule 10b-18. The conditions are set forth below, each followed by the proposed update, if any.
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.
It should be noted that the “single broker or dealer” condition only applies to purchases that are “solicited” by or on behalf of an issuer. Therefore, purchases may be made by more than one broker or dealer as long as the transactions are not solicited, which is determined on a case-by-case basis.
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).
Proposed Amendment. The proposed amendment to Rule 10b-18 would update the prohibition on being the opening purchase of the day to include not only the opening purchase in the consolidated trading system, but would be expanded to prohibit being the opening purchase in the principal market for the security, and in the market where the purchase is effected. With many securities now trading in more than one market, and trading via electronic orders, the Commission feels it necessary to expand its limitations.
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.
Proposed Amendment. Issuers want to be able to purchase at the VWAP price (volume-weighted average price). The proposed amendment to Rule 10b-18 allows issuers to purchase at the VWAP (volume-weighted average price) price if the following criteria are met:
- The security is an “actively-traded security,” as defined in Regulation M;
- The purchase is entered into or matched before the opening of the regular trading session;
- The execution price of the VWAP purchase is determined based on all regular way trades effected in accordance with specified conditions that are reported in the consolidated system during the primary trading session for the security;
- The purchase does not exceed 10% of the security’s relevant average daily trading volume;
- The purchase is not effected for the purpose of creating actual, or apparent, active trading in or otherwise affecting the price of any security;
- The VWAP is calculated in accordance with the provisions of the Rule; and
- The purchase is reported using a special VWAP trade modifier.
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.
Flickering Quotes. The SEC acknowledges that the speed at which current markets move, citing “flickering quotes” specifically, has made it increasingly difficult for an issuer to ensure that every purchase of its common stock during the day meets the Rule’s current price condition. Flickering quotes occur when there are rapid and repeated changes in the current national best bid during the period between identification of the current national best bid and the execution or display of the Rule 10b-18 bid or purchase. In many active NMS stocks, the price of a trading center’s best displayed quotations can change multiple times in a single second. Failure of any one of the four conditions of Rule 10b-18 with respect to any sale will disqualify all purchases during that day from the benefit of the safe harbor. The SEC proposes to amend Preliminary Note 1 to Rule 10b-18 and paragraph (d) of the Rule to limit the Rule’s disqualification provision in instances where an issuer’s repurchase order is entered in accordance with the Rule’s four conditions but is, immediately thereafter, executed outside of the price condition solely due to flickering quotes. In these instances, only the noncompliant purchase, rather than all of the issuer’s other Rule 10b-18 purchases for that day, would be disqualified from the safe harbor.
The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate and securities law matters. Please contact us if you have any questions.
Brian A. Lebrecht, Esq. 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 via e-mail at email@example.com with questions or comments. Please visit our website at www.thelebrechtgroup.com for future updates and other information.