SEC Proposes Amendments to Rule 10b-18 Safe Harbor for Issuer Share Repurchases

Transcription

1 SEC Prpses Amendments t Rule 10b-18 Safe Harbr fr Issuer Share Repurchases January 29, 2010 On January 26, 2010, the Securities and Exchange Cmmissin ( SEC ) prpsed amendments t Rule 10b-18 under the Securities Exchange Act f The SEC is sliciting cmments n the prpsed amendments thrugh March 1, Rule 10b-18 prvides a nn-exclusive safe harbr frm liability under the anti-manipulatin prvisins f the Exchange Act, including Rule 10b-5, when an issuer 2 repurchases shares f its cmmn stck in cnfrmity with the cnditins f the Rule regarding the manner, price, vlume and timing f such purchases. The cnditins t Rule 10b-18 are designed t minimize the impact f issuer repurchases n the market, thereby allwing a security s price t be established based n independent market frces withut undue influence by the issuer. The SEC s prpsed amendments t Rule 10b-18 are intended t clarify and mdernize the Rule in light f recent market develpments. PROPOSED AMENDMENTS TO RULE 10b-18 The prpsed amendments t Rule 10b-18 include: Tightening f the timing cnditin with respect t pening purchases The Rule 10b-18 safe harbr currently excludes frm its scpe pening regular way purchases reprted in the cnslidated system. The prpsed amendments wuld als exclude the pening purchase(s) in bth the principal market fr the cmmn stck and the market where the issuer repurchases are effected. Relaxing the price cnditin as it relates t VWAP purchases The price cnditin f Rule 10b-18 requires that each repurchase be made at a price that is n higher than the higher f (x) the highest independent bid and (y) the last independent transactin price, quted r reprted in the cnslidated system at the time that the purchase is effected. The SEC has prpsed excepting frm the Rule 10b-18 price cnditin purchases made at a vlume-weighted average price ( VWAP ) if: 1 Purchases f Certain Equity Securities by the Issuer and Others, Release N , available at 2 The Rule 10b-18 safe harbr may als apply t purchases f an issuer s cmmn stck made by an affiliated purchaser. In the memrandum, references t issuers includes their affiliated purchasers.

2 Memrandum January 29, 2010 the securities purchased are actively-traded securities; 3 the VWAP purchase is entered int r matched befre the regular trading sessin pens; the VWAP purchase price is determined based n a full trading day s vlume, fllwing a calculatin prcedure that uses nly prices frm regular way trades effected in accrdance with Rule 10b-18 timing and price cnditins that are reprted in the cnslidated system during the primary trading sessin fr the security; the VWAP purchase des nt exceed 10% f the average daily trading vlume ( ADTV ) in the security; the VWAP purchase is nt effected fr the purpse f creating actual, r apparent, active trading in r therwise affecting the price f any security; and the VWAP purchase is reprted using a special VWAP trade mdifier (.W ). Relaxing the price cnditin as it relates t disqualificatins due t flickering qutes Under Rule 10b-18 as currently frmulated, any purchase that vilates the pricing cnditin wuld disqualify all purchases by the issuer n the same day. The SEC has prpsed that, t the extent that nn-cmpliance with the pricing cnditin is attributable t flickering qutes (i.e. rapidly changing qutes that may change multiple times in a single secnd, making it difficult fr the purchaser t cmply with the pricing cnditin), such vilatin wuld nt disqualify ther purchases made by the issuer n the same day with respect t which all the cnditins f the safe harbr were met. Other ptential exceptins fr alternative passive pricing systems - The SEC has als slicited cmments with respect t ther pssible exceptins t the pricing cnditin fr purchases effected using ther alternative passive pricing systems, such as the mid-pint f the natinal best bid and ffer r mid-peg rders. Expansin f the merger exclusin with respect t SPACs Rule 10b-18 currently limits the availability f its safe harbr during the perid frm the public annuncement f a merger, acquisitin r similar transactin invlving a recapitalizatin t the earlier f (i) the cmpletin f such transactin and (ii) the vte by target sharehlders n such transactin (the merger exclusin ). The SEC has prpsed expanding the merger exclusin in cnnectin with an acquisitin by a special purpse acquisitin cmpany ( SPAC ) by extending the time perid during which the safe harbr is unavailable until the earlier f (x) the cmpletin f the acquisitin and (y) the cmpletin f the vte fr the transactin by sharehlders in bth the SPAC and the target cmpany. 3 As prpsed, actively-traded security wuld have the same meanings as under Regulatin M, which prvides that actively-traded securities have an ADTV f $1 millin r mre and a public flat value f $150 millin r mre. Page 2

3 Memrandum January 29, 2010 ADDITIONAL REQUESTS FOR COMMENTS In additin t sliciting cmments n the prpsed amendments described abve, the SEC has slicited cmments n a number f ther questins regarding the scpe f the Rule 10b-18 safe harbr, including: Availability f Safe Harbr t Less Liquid Securities Shuld the safe harbr cntinue t apply in the same manner t less liquid, less transparent securities, such as OTCBB and Pink Sheet securities? Cncurrent Insider Transactins Shuld the safe harbr be available at a time when the issuer s insiders are selling shares f the issuer s stck? Availability f Safe Harbr t Different Types f Securities and Transactins Shuld the safe harbr be available t securities ther than cmmn equity, such as preferred stck, warrants, rights, cnvertible debt securities r ther prducts? repurchases invlving the use f futures r ptins cntracts? 4 Cmmn stck share repurchases effected utside f the United States? Ptential Cncerns Raised by Nn-traditinal Methds What manipulative cncerns, if any, are raised by alternative r nvel methds f repurchasing securities, such as accelerated share repurchase prgrams, use f derivatives r share accumulatin prgrams? Are there limitatins that shuld be intrduced t address these cncerns? Disclsure Cnsideratins - Shuld the safe harbr nly be available t issuers wh have made available current financial disclsures? wh cmply with U.S. disclsure requirements regarding issuer stck repurchases? wh disclse repurchases n a daily basis r even a real time basis? and/r wh maintain (and prvide the SEC, upn request) separately retrievable written recrds cncerning the trade details? * * * 4 It is nt clear whether ther types f derivatives were intentinally mitted frm this questin in the release. In the same paragraph the SEC asked (a) shuld the number f shares underlying the ptin r security futures cntract (r ther derivative security) entered int by an issuer cunt against an issuer s 25% daily vlume limitatin... (emphasis added) and (b) what effect, if any, shuld taking delivery f cmmn stck pursuant t such transactin have n Rule 10b-18 s ther cnditins? Additinally, the SEC s questins regarding purchases by nn-traditinal methds suggest that the SEC may be cnsidering expanding the availability f Rule 10b-18 s safe harbr t issuer share repurchases made pursuant t, and brkers cvering transactins in cnnectin with, accelerated share repurchase prgrams, frward share repurchase cntracts and ther derivatives. Page 3

4 Memrandum January 29, 2010 This memrandum is fr general infrmatin purpses and shuld nt be regarded as legal advice. Please cntact yur relatinship partner if we can be f assistance regarding these imprtant develpments. The names and ffice lcatins f all f ur partners, as well as ther recent memranda, can be btained frm ur website, The cntents f this publicatin are fr infrmatinal purpses nly. Neither this publicatin nr the lawyers wh authred it are rendering legal r ther prfessinal advice r pinins n specific facts r matters, nr des the distributin f this publicatin t any persn cnstitute the establishment f an attrney-client relatinship. Simpsn Thacher & Bartlett LLP assumes n liability in cnnectin with the use f this publicatin. Page 4

5 Memrandum January 29, 2010 UNITED STATES New Yrk 425 Lexingtn Avenue New Yrk, NY Ls Angeles 1999 Avenue f the Stars Ls Angeles, CA Pal Alt 2550 Hanver Street Pal Alt, CA Washingtn, D.C F Street, N.W. Washingtn, D.C EUROPE Lndn CityPint One Rpemaker Street Lndn EC2Y 9HU England +44-(0) ASIA Beijing 3119 China Wrld Twer One 1 Jiangumenwai Avenue Beijing China Hng Kng ICBC Twer 3 Garden Rad, Central Hng Kng Tky Ark Mri Building 12-32, Akasaka 1-Chme Minat-Ku, Tky Japan LATIN AMERICA Sã Paul Av. Presidente Juscelin Kubitschek, 1455 Sã Paul, SP Brazil