SEC Proposes Amendments to Rule 10b-18 Safe Harbor Provision
January 27, 2010
On January 26, 2010, the Securities and Exchange Commission proposed for comment amendments to Rule 10b-18 under the Securities Exchange Act of 1934 (SEC Release No. 36-61414 (January 26, 2010)) that would, if adopted, make changes to the “safe harbor” from liability for manipulation available to issuers repurchasing their common stock in the market. These changes seek to modernize the safe harbor in light of market developments in the speed and manner of market purchases. In addition, the Commission proposes to lengthen the period of time following the announcement of a proposed acquisition during which special purpose acquisition companies, or “SPACs,” are ineligible to rely on the safe harbor.
The Commission is soliciting comments on the proposed amendments. Comments will be due 30 days after the proposal is published in the Federal Register. The Commission’s full release, including the text of the proposed amendments, is available here.
Rule 10b-18 provides issuers with a safe harbor from liability for manipulation under Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 under the Exchange Act when they repurchase their common stock in the market according to the rule’s conditions relating to the manner, timing, price and volume of the repurchase transaction. Those conditions are designed to minimize the market impact of the issuer’s repurchases. The amendments proposed by the Commission are:
- Timing Condition: Opening Purchases in Principal Market. The Commission proposes to amend the timing condition to prohibit issuers seeking the safe harbor from making the opening purchase in either the principal market for the security or the market where the purchase is effected, in addition to the rule’s current condition that the repurchase not be the opening regular way purchase reported in the consolidated system. The Commission notes that the opening transaction in those markets, like the opening regular way purchase reported in the consolidated system, can be a significant indicator of the direction of trading, the strength of demand and the current market value of a security.
- Price Condition: VWAP Purchases. The proposal would amend the safe harbor so that issuers repurchasing shares on a volume-weighted average price, or “VWAP,” basis are exempt from the safe harbor’s price conditions, provided that certain conditions are met. Under the current rule, an issuer may only bid for or buy its shares at a price equal to or less than the higher of the highest independent bid or the last independent transaction price. Because a VWAP execution price is based on the prices of many individual trades executed throughout the trading day, it may exceed the safe harbor’s maximum permitted price. To be eligible for the proposed price condition exemption, the issuer must be purchasing an actively-traded security (as defined under Rule 101(c)(1) of Regulation M); the VWAP purchase may not exceed 10% of the average daily trading volume in the security; the VWAP purchase must be entered before the regular trading session opens; and the VWAP must be calculated using the full day’s trading volume and in the manner specified by the rule. In addition, the Commission is soliciting comments on the merits of creating exemptions for other passive or independently-derived pricing mechanisms, including mid-point of the national best bid and offer or “mid-peg” orders.
- Price Condition: “Flickering Quotes”. The Commission also proposes to amend the price condition so that an issuer that violates the rule’s price requirements due to rapid fluctuations in market bid quotes does not thereby lose the protection of the safe harbor for all purchases executed on that day. The Commission notes that the marked increase in the speed and volume of security market purchases has increased the likelihood and frequency of such violations. Under the current rule, once an issuer has committed such a violation, none of its purchases on that day is eligible for safe harbor protection. Under the proposal, only the purchases that exceed the permitted price would be disqualified from safe harbor protection.
- Merger Exclusion: SPAC Acquisitions. The Commission’s proposed amendments would extend the time that the safe harbor is unavailable in connection with an acquisition by a special-purchase acquisition company, or “SPAC,” until the SPAC’s shareholders have voted on the transaction. Under the current rule, safe harbor protection is not available during the period of time from the public announcement of a merger, acquisition or similar transaction until the vote by the target shareholders with regard to the transaction. The Commission would amend this rule, solely as it applies to SPACs, so that the period of ineligibility for the safe harbor extends until both the target shareholders and the SPAC’s own shareholders have voted on the transaction. Under the current rule and the proposed amendment, SPACs do not lose eligibility for safe harbor protection following the announcement of an acquisition so long as (i) the total amount of repurchases effected on any single day does not exceed the lesser of 25% of the security’s four-week ADTV or the issuer’s average daily Rule 10b-18 purchases during the three full calendar months preceding the date of the announcement of the acquisition and (ii) block purchases do not exceed the average size and frequency of the issuer’s Rule 10b-18 block purchases during the three full calendar months preceding the date of the announcement of the acquisition. The Commission’s SPAC acquisition amendment is proposed in response to the practice of SPAC management buying up SPAC shares in order to increase the likelihood of a favorable shareholder vote related to a proposed merger.
In addition to the specific proposals described above, the Commission requests comments on a broad range of issues surrounding the availability of the safe harbor, including whether the safe harbor should:
- be available for issuer repurchases during periods when an issuer’s insiders are selling their own shares of the issuer’s stock;
- require that an issuer make available current financial disclosures before engaging in covered repurchases;
- require that an issuer disclose information regarding repurchases, potentially including information regarding repurchases executed without reliance on the safe harbor;
- require an issuer to maintain written records concerning the trade details (trade-by-trade information) about the manner, timing, pricing and volume of repurchases;
- extend to securities other than common equity;
- be available for purchases involving security futures or option contracts;
- cover an issuer’s repurchases effected on foreign exchanges;
- be available outside the United States only to foreign private issuers or companies whose principal market is outside the United States; or
- impose different conditions for safe harbor protection with respect to purchases outside the United States.
Please feel free to contact any of your regular contacts at the firm or any of our partners and counsel listed under Capital Markets if you have any questions.