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E-MailDavid A. Katz, Victor Goldfeld, and Jenna Levine are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum. Related research from the Program on Corporate Governance includes Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here) and Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).
Continuing the trend of public attacks on corporate share repurchases in the current political environment, a group of 19 organizations, including the AFL-CIO and Public Citizen, has submitted a rulemaking petition to the SEC requesting elimination of the existing safe harbor protecting public companies from liability for market manipulation under the Exchange Act for compliant stock repurchases. The petition calls for replacing the existing Rule 10b-18 with a more comprehensive regime. Public company stock buybacks typically avail themselves of the protections of Rule 10b-18 in order to protect against claims that the repurchases violate federal securities laws relating to market manipulation. Although stock repurchases made outside of Rule 10b-18 may not violate the securities laws, they do not have the benefit of the safe harbor.
The petition contends that the current rule has “failed to prevent executives from using repurchases to boost a company’s stock price or meet other performance goals at the expense of investing in its workers,” and that the existing disclosure requirements are inadequate. The petitioners cite evidence that corporations devote substantial capital to buybacks, noting the recent uptick following the enactment of the Tax Cuts and Jobs Act, and argue that the funds would be better spent on “wages, training, hiring” and other capital investments. The petitioners request that the SEC develop a “more comprehensive framework” to deter manipulation and protect workers, and propose that the SEC consider certain suggestions made in prior rulemaking processes (including additional disclosure requirements and tighter trading limits) and consider adopting regulatory features imposed in certain other countries (such as shareholder approval requirements and prohibitions on executive trading).
The petition raises several claims that may merit further study, but any revision to the regulatory scheme governing repurchases must be approached with caution. While excessive stock repurchases can hamper long-term investment and value creation, the return of capital is an important contributor to the health of the U.S. capital markets, and buybacks are not inherently suspect. Moreover, the federal securities laws are not the appropriate avenue to address the complex public policy issues raised by the rulemaking petition and other critics of stock repurchases.
