Among the issues that must be considered in establishing a stock buy back program are the Rules of the Securities and Exchange Commission ("SEC") which apply to such programs. The principal focus of the SEC is to eliminate, to the greatest extent possible, any price manipulation which may occur as a result of a company's acquisition of its own shares in the marketplace. Establishing a stock buy back program in compliance with the Rules can also protect a company and any of its insiders participating in such a plan from claims of insider trading.
Rule 10B18
Rule 10b18 is the principal rule which must be followed. If a company establishing a buy back program (the “Company”) meets the following standards, it will not be deemed to have violated antimanipulation provisions of the Exchange Act:
Regulation M
Regulation M is designed to govern the activities of companies in connection with offerings of securities. Its intent is to preclude manipulative conduct by persons or parties with an interest in the outcome of an offering.
If the Company intends to offer common stock to the public or use common stock as currency in an acquisition during the Company’s buy back program, Rule 102 of Regulation M prohibits the Company from bidding for, purchasing or attempting to induce any person to bid for or purchase securities during the restricted period for the particular offering.
The restricted period begins as early as five days prior to the determination of the price or value of the Company’s stock for purposes of the acquisition and ends upon completion of the distribution (i.e., closing of the acquisition).
Rule 10B5-1
In October 2000, the SEC adopted Rules 10b5-1 and 10b5-2 in an attempt to clarify circumstances where an individual will be liable for insider trading. A key aspect of these new Rules is a person will be liable for any trading occurring while in possession of material nonpublic information. The presumption is that a person who is aware of insider information necessarily uses that information when deciding to execute a trade in that security.
One affirmative defense to this presumption is an opportunity to demonstrate that the possession of inside information was not a factor in a challenged transaction by showing that the purchase or sale was made in accordance with a sufficiently specific and binding contract, plan or set of instructions that were put into place at a time when the person was not aware of the material nonpublic information.
The Company can both avail itself of this affirmative defense in purchasing its own stock as well as afford its insiders the defense in tendering their stock through the use of a stock buy back program that conforms to the requirements of Rule 10b5-1. Such a program would not need to specifically set forth amounts, dates and prices of planned repurchases, but could either employ a formula to determine such information or grant the discretion to determine such information to a third party who is not in a position to have material nonpublic information and who is not under the influence of the Company.
A stock buy back program that meets the requirements of Rule 10b5-1 must obligate the participant to sell the security to the Company or grant a third-party the independent discretionary authority to do so. It can be established by binding contract, a set of instructions directing a third party to make sales, or a written plan for trading. In general, the participant must (a) decide today how he or she will sell (in the case of a buy back program) the security in the future, or (b) turn over the power to make that decision to an individual who will make that determination independently.
C. K. Cooper & Company assembles a team of experts for each corporate re-purchase program to manage the relationship, the trading activity and compliance aspects associated with each customer’s objectives. Please contact C. K. Cooper & Company for a proposal on a stock re-purchase program.
