Share buy-backs have been a common theme in the UK market in 2016 with many listed companies announcing buy-back programmes. Whilst this buy-back trend does not look likely to change, there have been recent changes in the EU law and Listing Rules governing them. With thanks to George Swan and Jennifer McCarthy, in this tip we set out the key changes that MAR has brought about for listed company buy-backs.

  • What… rules apply to share buy-backs for London listed companies? Companies with a premium listing in London must comply with the relevant company law, market abuse legislation and the requirements of LR12. They may also choose to comply with the revised MAR share buy-back safe harbour but do not have to. We explain this choice below but first let’s start with LR12.
  • What… does LR12 require? LR12 is much shorter than it was pre-MAR. Broadly, it imposes:
    • Pricing restrictions – for example, the price paid by the company purchasing its equity shares, other than by way of tender offer or with specific shareholder approval, must not exceed the higher of 5% above the average market value of the company’s equity shares for the five business days prior to the date of purchase, the price of the last independent trade on the trading venue where the purchase is carried out and the highest current independent purchase bid on that venue (LR12.4.1 to 12.4.3).
    • Daily disclosure obligations – the company must publicly announce certain information as soon as possible on a daily basis, including the date of purchase, number of shares purchased, the highest and lowest price paid and whether shares were purchased for cancellation or to be held as treasury shares (LR12.4.4 to 12.4.6).
  • Does… LR12 act as a safe harbour from market abuse? No. The only safe harbour is contained in MAR – see Article 5 and the regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures (Commission Delegated Regulation (EU) 2016/1052, the CDR). It exempts share buy-back programmes from the market abuse prohibitions on insider dealing, unlawful disclosure of inside information and market manipulation provided they are carried out in accordance with the rules on disclosure, reporting, price and trading conditions set out in MAR and the CDR.
  • Do… companies have to comply with the MAR safe harbour requirements? No. Provided that a company has disclosed all inside information at the relevant time, and the share buy-backs are conducted in a way which does not otherwise mislead or manipulate the market, buy-backs conducted outside the MAR safe harbour will not constitute market abuse (see Topical Tip – 23 May 2016 – The Market Abuse Regulation: What does it mean for market participants?).
  • So… why would a company choose not to comply? The safe harbour is limited to share buy-backs. A buy-back programme covering other securities, or including buy-backs by way of derivatives, will always be outside the safe harbour. Companies may also choose not to comply with the MAR safe harbour as a result of the additional compliance and disclosure burden that this brings. But this means they must take extra care to ensure that their share buy-back activities do not fall foul of the market abuse rules in MAR.
  • What… extra steps must companies take if they want to be within the MAR safe harbour? Broadly, they must:
    • Preliminary public disclosures – disclose before the start of trading under the programme: (i) the purpose of the programme, (ii) the maximum amount available to be spent by the company, (iii) the maximum number of shares to be acquired, and (iv) the duration of the programme. Those disclosures must be updated if the position subsequently changes. These and the later notifications are designed to avoid any hidden dealings and mean that the market knows what may happen and has happened.
    • Price and volume conditions – not purchase shares at a price higher than the higher of the price of the last independent trade and the highest current independent purchase bid on the trading venue where the purchase is carried out (this is less restrictive than the LR12 requirements), and not purchase on any trading day more than 25 per cent. of the average daily volume of the shares on the trading venue on which the purchase is carried out.
    • Trading restrictions – not sell shares during the duration of the programme or make purchases during a MAR closed period or when the company is delaying disclosure of inside information. These restrictions do not apply in certain circumstances, for example where the company has in place a time-scheduled buy-back programme or a programme lead-managed by an independent investment firm which makes its trading decisions concerning the timing of the purchases of the company’s shares independently of the company. These restrictions are designed to reduce the impact of the buy-back on the share price.
    • Competent authority (CA) and public notifications – report to the CA of each trading venue on which the shares are admitted to trading or are traded (in the UK, the FCA), no later than the end of the seventh daily market session after the relevant transaction, all the transactions relating to the buy-back programme. This transaction notification must include disaggregated and aggregated data, with the aggregated form indicating the aggregated volume and weighted average price per day and per trading venue. This information must be disclosed publicly at the same time.
  • Does… a listed company really have to include disaggregated data in its CA notifications and public announcements? Yes. But remember not all trades will be caught depending on the structure adopted.
  • So… what trades need to be included in the CA notification and public disclosure? The trades requiring notification and disclosure are those made by the company itself. If a company has its broker go into the market and make purchases as principal, it is the trade between the broker and the company that needs to be disclosed. Where the trade between the broker and the company is done at the average price of the underlying broker trades, care should be taken to ensure that this price meets the price criteria under LR12 and the MAR safe harbour.
  • Can… a listed company just notify the CA of the trading venue where buy-back purchases are actually made? No. Notification must be made to the CA of each trading venue on which the company’s shares are trading or admitted to trading. This may include regulated markets or multilateral trading facilities (MTFs) where shares are trading without the company seeking their admission, making it difficult for companies to be confident that they have made all required notifications. Although it is intended that ESMA will in due course maintain on its website a list of financial instruments and the venues on which each is traded, this information is not yet available (and even when produced, companies will not be able to rely on it to limit the scope of MAR). For the time being we understand that the FCA expects companies to make best efforts to establish all relevant competent authorities, including for example all trading venues to which the company has agreed or indicated their non-opposition to trading. This seems a pragmatic approach. Issuers should check to see how different CAs want to be notified as there is no standard template.
  • So… how should a listed company notify the FCA? The FCA has prepared its own template spreadsheet which it views as representing a helpful notification (this template is not at present on the FCA website, but the FCA will provide it on request). The FCA template does however require more information than the MAR safe harbour. For example, the FCA template requires specific details such as transaction times and reference numbers, which the FCA has indicated it finds useful to identify trades it wishes to look at. The notification should be sent to stabilisation@fca.org.uk.
  • Can… a listed company combine its LR12 obligations with its daily MAR public disclosures? Yes, and this option has been taken by a number of companies. Companies not taking this route, and instead making a daily LR12 announcement and a separate weekly MAR announcement in relation to the same trades, will need to take care that the overlapping announcements are not confusing for the market.
  • Can… companies carry out share buy-backs during a MAR closed period? Yes, but doing so will not be within the MAR safe harbour unless an exemption to the trading restrictions applies. This is in contrast to the pre-MAR position, when there was a complete prohibition on share buy-backs by premium listed companies during a Model Code prohibited period (in LR12.2, now deleted). The MAR changes have also deleted LR9.2.7, which broadly prohibited a company from effecting any dealings in securities at a time when directors would be prevented from doing so under the Model Code. Although MAR does not prohibit buy-backs during a MAR closed period, in order to be within the safe harbour when doing so, the company must either have in place a time-scheduled buy-back programme or ensure the buy-back programme is lead-managed by an independent firm. These conditions mirror those that applied under LR12.2 and companies may wish to comply with them as a matter of best practice even if they are not otherwise seeking to rely on the MAR safe harbour.