The collapse of U.S. housing prices and the ensuing subprime mortgage crisis, the failure and instability of numerous prominent financial institutions, and concern over the near-term health of the global economy have shaken investor confidence and sent share prices plummeting. While a downward adjustment in the trading range for securities isn't unexpected, the fear and panic that have influenced much of the trading of late may have resulted in a strong overcorrection. Against this backdrop, companies that are publicly traded in the United States with sufficient and accessible financial resources may now wish to consider the merits of implementing a stock repurchase program as a means of helping to support the stock's trading price.
A Canadian corporation that is interlisted on the Toronto Stock Exchange (TSX) and a U.S. stock exchange such as the NYSE, AMEX or NASDAQ (U.S. Exchange) may effect a stock repurchase program that entails repurchases of its outstanding securities through the facilities of the TSX, through the U.S. Exchange, or through some combination of purchases on both exchanges. In each case, the corporation must comply with an exemption from the "issuer bid" requirements of Canadian securities laws.
For purchases that are made through the facilities of the TSX under its normal course issuer bid rules, an issuer may repurchase up to the greater of 10% of its public float, or 5% of its outstanding securities, during any 12-month period. On any particular day, an issuer may repurchase up to the greater of 25% of the average daily trading volume of its shares or 1,000 securities. All such purchases must comply with the TSX normal course issuer bid rules, including requirements relating to the time and manner of purchase.
For purchases that are made on a U.S. Exchange, no more than 5% of the outstanding securities may be purchased in any 12-month period in order to comply with Canadian securities law requirements. Those purchases will not be subject to the TSX normal course issuer bid rules, but should comply with Rule 10b-18 (the Rule) under the U.S. Securities Exchange Act of 1934 (Exchange Act).
Rule 10b-18 Safe Harbour
Rule 10b-18 provides an issuer and its "affiliated purchasers" a non-exclusive "safe harbour" from liability under the Exchange Act's anti-manipulation provisions for open market repurchases of common stock (or equivalent interests) in the United States that comply with specified conditions governing the manner, timing, price and volume of the repurchases.
Companies whose securities also trade on markets outside the United States, such as on the TSX, cannot claim the safe harbour for repurchases made outside the United States and must exclude any foreign trading volume when calculating a security's average daily trading volume (ADTV) as discussed below. Note that the Rule is not the only manner in which a company is able to effect a stock repurchase in the United States, and failure to abide by the Rule does not automatically create a presumption that the company has violated the anti-manipulation provisions of the Exchange Act.
Key Conditions
Issuers must satisfy the following four key conditions to fall within the Rule's safe harbour:
- All Rule 10b-18 purchases must be effected from or through only one broker or dealer on any single day.
- Repurchases of issuer securities may not be the opening (regular way) purchase reported in the consolidated system. (There are additional purchase timing prohibitions based on the security's ADTV and the dollar value of its public float.)
- The purchase price may not exceed the highest independent bid or the last independent transaction price, whichever is higher. For those securities for which pricing information is not reported in the consolidated system or on an exchange, the price may not exceed the highest independent bid obtained from three independent dealers.
- Daily share repurchases may not exceed 25% of the security's ADTV (which means the average daily trading volume reported for the security during the four calendar weeks preceding the week in which the purchase is to be effected). The Rule also permits an issuer to make one block purchase each week instead of making any other Rule 10b-18 purchase on that day. Additional provisions govern certain after-hours purchases.
Disclosure Obligations
Issuer repurchases must be disclosed as part of an issuer's annual report on Form 20-F or Form 10-K (as applicable). Issuers reporting on Form 40-F must disclose in their MD&A the number of shares outstanding in each quarter. Issuers who report on Form 10-Q must also provide quarterly disclosure of any repurchases.
Insider Trading and Announcement of Repurchase Program
Rule 10b-18 does not provide immunity from liability under Rule 10b-5 under the Exchange Act if the issuer repurchases its securities while in possession of material non-public information (e.g., proposed merger or acquisition activity, or changes in earnings, financial results or forecasts). Additionally, the fact that a company proposes to initiate an issuer repurchase program would generally be considered to be material and should be disclosed (typically through a press release).
Other Considerations
Credit agreements, indentures, leases and other potentially relevant agreements must be reviewed to ensure that they do not prohibit stock repurchases or advance notice requirements. Similarly, outstanding convertible securities, warrants or stock options should be reviewed to see if a repurchase program would trigger those securities' anti-dilution provisions. Also, corporate law statutes may contain limitations on a company's ability to repurchase its securities.
Issuers contemplating a stock repurchase program should carefully review the U.S tender offer requirements with legal counsel to avoid triggering those requirements. While SEC regulations do not define what constitutes a tender offer, under applicable case law, a normal course issuer repurchase program complying with Rule 10b-18 and effected in the open market at various prices and without special solicitation efforts should not constitute a tender offer.
Kevin Cramer is a partner in the Business Law Department of the firm's New York office where he practices U.S. securities and M&A law. James Lurie is a partner in the Business Law Department of the firm's New York office. Rob Lando is a partner in the firm's New York office, where he practises Ontario and New York law. Sue Krembs is a partner in the Business Law Department of the firm's New York office, with a practice devoted to U.S. legal matters. Jason Comerford is an associate in the Business Law Department in the firm's New York office where his primary emphasis is on assisting Canadian and U.S. clients with U.S. corporate finance and mergers and acquisitions transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
