The Securities and Exchange Commission (the “SEC”) last week proposed amendments to the Rule 10b-18 safe harbor for issuer stock repurchases.1 Compliance with Rule 10b-18 offers protection from the antimanipulation provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, most companies conducting share buyback programs seek to structure such programs to comply with Rule 10b-18. However, compliance has become more difficult as a result of new trading methodologies that fall outside the safe harbor even though such methodologies present little risk of market manipulation. Conversely, opening purchases in certain markets, together with repurchases during the pendency of SPAC transactions, currently fall within the safe harbor even though they present a risk of manipulation. The proposed amendments are intended to modernize Rule 10b-18 to address these issues.
If adopted as proposed, the amendments would primarily make the following changes:
Permit VWAP purchases. The proposed amendments would expand the safe harbor to cover company repurchases using the now widely-accepted volume-weighted average price (“VWAP”) methodology, subject to certain conditions intended to reduce the risk of market manipulation.
Further restrict opening purchases. The proposed amendments would restrict companies from making the opening purchase in the stock’s principal market and in the market in which the transaction is being effected, in addition to the current restriction on being the first purchase reported in the consolidated system.
Expand the safe harbor to accommodate “flickering quotes.” Under the proposed amendments, a company’s noncompliance with the price condition of the rule solely due to “flickering quotes” would only disqualify the noncompliant purchase from the protection of the safe harbor and not all purchases for that trading day.
Expand the merger exclusion for SPACs. The proposed amendments would exclude from the protection of the safe harbor all repurchases by special purpose acquisition companies (“SPACs”) involved in an acquisition, when such repurchases were made prior to a vote of the SPAC shareholders.
The SEC is seeking public comment on the proposed amendments on or before March 1, 2010.
Proposed Rule Changes
We have listed below the current provisions of the rule that are proposed to be changed, together with the proposed change and a discussion of its impact.
The SEC is also seeking public comment regarding other aspects of the safe harbor, including:
- The application of the safe harbor to securities trading on the over-the-counter markets, such as the OTCBB and Pink Sheets, and any additional restrictions on repurchases of such securities that would help minimize market manipulation.
- The sufficiency of the safe harbor’s volume condition or the thresholds necessary to satisfy that condition.
- The availability of the safe harbor for purchases using other passive and independently-derived pricing mechanisms, such as NBBO.
- The availability of the safe harbor when an issuer’s insiders are selling the issuer’s stock.
- The disclosures that should be required to be eligible for the safe harbor, including current financial information and specified information regarding the share repurchases and the timing of such disclosures.
- The maintenance of records evidencing compliance with the provisions of the safe harbor.
- The expansion of the safe harbor to cover other securities of the issuer, such as preferred stock, warrants, convertible debt securities, securities futures or option contracts or other securities.
- The application of the safe harbor to the purchases of an issuer’s securities on foreign exchanges, the issuers that should be eligible for any such provision and the conditions applicable to such purchases.