Share buybacks have returned with a vengeance following the COVID-19 pandemic. The average proportion of buybacks out of aggregate shareholder payouts in 2019-2021 was higher than the historical average during 2005-2019 in the U.S. and Europe. These developments have attracted broad criticism from academics and policymakers, with many seeking to curb share buybacks to reduce the risks of insider trading, market manipulation, the harm to long-term shareholder value, and other concerns. Buybacks can potentially be insider trading if the issuer – as the ultimate corporate “insider” – is purchasing shares from the market on the basis of material non-public information that the share price is undervalued.
Rule 10b5-1 establishes affirmative defenses to insider trading for issuers that repurchase securities pursuant to trading arrangements that are adopted in “good faith” before the issuer becomes aware of material non-public information and that comply with prescribed price, volume, and timing requirements (“Rule 10b5-1 Trading Arrangements”). This safe harbor has been the subject of recent reforms since the Securities and Exchange Commission (SEC) concluded in 2021 that it was being abused and leading to “real cracks” in the U.S. insider trading regime. In a new article, I evaluate the SEC reforms in comparison with the UK and EU approaches under the Market Abuse Regulation.
SEC Reforms to Rule 10b5-1 for Share Buybacks
The SEC adopted rules on December 14, 2022 that set out new requirements for the safe harbor, with companies (other than smaller reporting companies) required to comply with the new disclosure requirements in their filings for the first full fiscal period beginning on 1 April 2023. The new amendments include:
- A cooling-off period for directors and officers of 90 days following the adoption of the Rule 10b5-1 Trading Arrangement or two business days after the filing of a Form 10-Q or 10-K (whichever is later), subject to a maximum of 120 days.
- A certification by a director or officer adopting a written plan for trading securities that he or she is unaware of material non-public information at the time of its adoption and is adopting the plan in good faith and not to evade the prohibitions of Rule 10b5-1.
- Restrictions on the use of single-trade plans in any 12-month period and multiple overlapping Rule 10b5-1 Trading Arrangements for persons other than the issuer, except in certain circumstances.
- The requirement that the Rule 10b5-1 Trading Arrangement be entered into in good faith.
New disclosure rules require issuers to make quarterly disclosures in their Form 10-Q and Form 10-K filings of the prescribed details of Rule 10b5-1 Trading Arrangements and other trading arrangements adopted or terminated by a director or officer, such as the date of adoption and duration of the trading arrangement and the aggregate number of securities to be traded (other than pricing terms). Issuers must also disclose their insider trading policies in their annual reports on Form 10-K.
Notably, many of these amendments are weaker than the SEC’s proposed rules with respect to share buybacks conducted by the issuer. In particular, the SEC chose not to require corresponding quarterly disclosures and a cooling-off period with respect to the adoption of Rule 10b5-1 Trading Arrangements by the issuer, preferring to take a wait-and-see approach. In a separate proposal that has yet to be made final, the SEC would require that:
- Issuers disclose under a new Form SR any repurchases before the end of the business day after the repurchase, including the average price paid for each share and the aggregate number of shares repurchased pursuant to a Rule 10b5-1 Trading Arrangement and the Rule 10b-18 safe harbor, respectively.
- Quarterly disclosures under Item 703 of Regulation S-K include the issuer’s objective for its repurchases and the date of adoption and termination of the trading arrangement, as well as whether the repurchases were made pursuant to the Rule 10b-18 safe harbor and a Rule 10b5-1 Trading Arrangement.
- Such quarterly disclosures state whether the issuer’s relevant officers or directors have traded in securities subject to the issuer’s buyback program within 10 business days before or after its announcement.
Shortcomings of the SEC’s Reforms
The key shortcoming of the SEC reforms are the absence of prospective disclosure requirements with respect to the adoption of Rule 10b5-1 Trading Arrangements and other trading arrangements despite its stated purpose of mitigating “asymmetries [which] may exist between issuers and affiliated purchasers and investors with regard to information about the issuer and its future prospects.”
Such inside information may be divided into two categories: (a) “transaction-specific inside information” and (b) “issuer-specific inside information.”
Transaction-Specific Inside Information
This refers to material non-public information about a prospective transaction that the issuer intends to undertake. The issuer’s decision to execute a buyback program constitutes transaction-specific inside information in its possession. Such knowledge that has not been publicly disclosed is highly valuable price-sensitive information that may be exploited by the issuer’s management and other insiders for financial benefit. In its key phases, a buyback program involves material non-public information, including (a) the size, form, duration, and impact on the issuer’s financial position of the buyback program, (b) the transaction prices and the rate of reduction in the issuer’s capital; and (c) transaction details such as the prices and volume of the repurchases.
Issuer-Specific Inside Information
This refers to material non-public information that the issuer knows about itself that might have influenced its decision to conduct a buyback program. The issuer’s knowledge of the undervaluation of its shares, for example, constitutes issuer-specific inside information in its possession. The risk of insider trading in such circumstances is considerable as the issuer may repurchase its shares prior to releasing issuer-specific inside information to the market.
While the additional disclosure requirements with respect to Rule 10b5-1 Trading Arrangements improve the timeliness and quality of information provided to the market, they still fall short of requiring the issuer to provide ex ante detailed disclosures of a proposed buyback program or Rule 10b5-1 Trading Arrangement. The benefit of the additional ex postdisclosures proposed by the SEC are negated by the absence of such ex ante disclosures as the issuer may benefit from trading on the basis of its own knowledge of its proposed program or trading arrangement, thereby profiting from the subsequent increase in share price following the ex post disclosures of the transactions.
A Comparison with the UK and EU Approach under the Market Abuse Regulation
The SEC proposals would have benefited from a comparative analysis of similar safe harbors in other jurisdictions. In the UK and EU, for example, share buyback trading arrangements are subject to a more stringent safe harbor under the Market Abuse Regulation (MAR). For the MAR safe harbor to apply, the issuer must disclose full details of its buyback program to the public before trading. For a “time-scheduled” buyback program, the issue must disclose the dates and volume of shares to be traded for the duration of the program. The European Commission recognized that share repurchases “could be used to strengthen the equity capital of issuers and so would be in investors’ interest.” However, the Commission also noted that buybacks “must be carried out transparently in order to avoid insider trading or giving misleading signals to the markets.”
The Committee of European Securities Regulators (CESR), which has been replaced by the European Securities and Markets Authority, recognized that decisions concerning buyback programs are potentially inside information directly concerning the issuer, especially since the execution of buyback programs is based on the issuer’s informational advantage and generally precedes an increase in the share price by reducing the number of shares traded on the market. The CESR noted that:
the safe harbour has been created to provide legal certainty to companies and to balance the economic benefits of these activities against the very real risks that these activities pose to the integrity of financial markets in the EU. CESR is of the view that the implementing measures must be particularly rigorous to mitigate risks from the abuse of inside information. As companies are a key source of inside information, the risk to market integrity in this area is particularly acute.
Thus, by requiring transparent disclosures of the buyback program, the MAR safe harbor provides a compromise between the interests of the issuer and of other investors and provides investors with important information about the likely direction of the share price, which facilitates price discovery. Importantly, to mitigate the risks of abuse, the MAR safe harbor requires buyback programs to be conducted for the sole purpose of:
- Reducing the issuer’s capital;
- Meeting the issuer’s obligations under convertible debt instruments; or
- Implementing share option programs or other share allocations to employees or members of the issuer or its associated company’s administrative, management, or supervisory bodies.
In comparison with the MAR, while issuers typically disclose buyback programs upon board authorization, as the SEC has noted, they are not required to, and typically do not, disclose specific details of the program such as the dates on which trading will occur pursuant to the program, apart from the board authorization under the Rule 10b5-1 safe harbor. These differences stem from the US system of “periodic” disclosure instead of “continuous” disclosure.
Suggestions for Reform
In addition to the current retrospective disclosures that issuers are required to make on a quarterly basis under Item 703 of Regulation S-K, ongoing reforms to the Rule 10b5-1 safe harbor should require such disclosures on a prospective basis. They should include details of the purpose and duration of the buyback program (including Rule 10b5-1 Trading Arrangements and other trading arrangements), the maximum number of shares to be repurchased, and the dollar amount allocated for the buyback program. Such information should be added as one of the itemized categories under Form 8-K for which disclosure must be made “on a more current basis” following board approval, given the price-sensitivity of such information. This would be consistent with the prohibition against selective disclosures under Regulation Fair Disclosure, which states that “events regarding the issuer’s securities” such as “repurchase plans” are potentially price-sensitive. Such prospective disclosures would ensure that material non-public information are priced into the issuer’s shares and reduce any unfair trading advantage by the issuer and other insiders.
Unlike the UK and EU, however, the U.S. has rejected the equal access approach since the Supreme Court decision in Chiarella, which required a defendant to disclose inside information before trading only when he had a fiduciary duty to, or “relationship of trust and confidence” with, the counterparty shareholders. Nevertheless, the courts have required companies to disclose material information when conducting share repurchases, even though the fiduciary reasoning employed by the courts in this regard is more apposite to off-market rather than on-market transactions. It is difficult to reconcile such reasoning with the position in Laventhall v General Dynamics Corp, in which the Eighth Circuit held that the issuer did not owe a duty of disclosure to an options holder for the issuer’s shares as “no relationship of trust and confidence” existed between them pursuant to Chiarella. However, it was prepared to accept that such a duty would arise in the case of an investor “contemporaneously trading in the same market” as there would have been a “transactional nexus” where the issuer had profited though its share repurchase “due to the imbalance of information.” This “disclose-or-abstain” rule for share buybacks may form the basis of strengthening the disclosure requirements under the Rule 10b5-1 safe harbor, which would at the very least increase the relative information efficiency of U.S. securities markets.
 Noah Zuss, ‘Share Buybacks Return After Covid-19 Pandemic Pause’ (2021) International Financial Law Review <https://www.iflr.com/article/b1s3qzj0x4kd70/share-buybacks-return-after-covid-19-pandemic-pause> accessed 20 October 2021.
 OECD, The Future of Corporate Governance in Capital Markets following the Covid-19 Crisis (OECD Publishing 2021) 56.
 See William Lazonick, ‘Profits Without Prosperity’ (2014) Harvard Business Review <https://hbr.org/2014/09/profits-without-prosperity> accessed 17 April 2022.
 Mark J Loewenstein and William KS Wang, ‘The Corporation as Insider Trader’ (2005) 30 Delaware Journal of Corporate Law 45, 46; Jesse M Fried, ‘Insider Trading via the Corporation’ (2014) 162 University of Pennsylvania LR 801, 804-816.
 17 CFR § 240.10b5-1(c)(1) (2006).
 Gary Gensler, ‘Prepared Remarks’ (CFO Network Summit, Washington DC, 7 June 2021) <https://www.sec.gov/news/speech/gensler-cfo-network-2021-06-07> accessed 12 October 2021.
 Insider Trading Arrangements and Related Disclosures, Release Nos. 33-11138; 34-96492 (14 December 2022).
 Share Repurchase Disclosure Modernization, Release No. 34-93783 (15 December 2021) 4.
 Emilios Avgouleas, The Mechanics and Regulation of Market Abuse (OUP 2005) 280.
 IOSCO, Report on “Stock Repurchase Programs” (2004) 16-17.
 Guido A Ferrarini, ‘The European Market Abuse Directive’ (2004) 41 Common Market Law Review 711, 735.
 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC  OJ L 173/1, art 5.
 Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilisation measures  OJ L 173/34, art 1(a).
 Commission, ‘Proposal for a Directive of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)’ COM (2001) 0281 final, .
 CESR, ‘CESR’s Advice on Level 2 Implementing Measures for the proposed Market Abuse Directive’ (2002) -.
 Sebastian Mock, ‘Article 5: Exemption for Buy-Back Programmes and Stabilization’ in Marco Ventoruzzo and Sebastian Mock (eds), Market Abuse Regulation: Commentary and Annotated Guide (OUP 2017) [B.5.06].
 CESR, ‘CESR’s Advice on Level 2 Implementing Measures for the proposed Market Abuse Directive’ (2002) -.
 Sebastian Mock, ‘Article 5: Exemption for Buy-Back Programmes and Stabilization’ in Marco Ventoruzzo and Sebastian Mock (eds), Market Abuse Regulation: Commentary and Annotated Guide (OUP 2017) [B.5.06], [B.5.16].
 Share Repurchase Disclosure Modernization, Release No. 34-93783 (15 December 2021) 4; Jesse M Fried, ‘Insider Trading via the Corporation’ (2014) 162 University of Pennsylvania LR 801, 813.
 Gallagher v Abbott Laboratories, Inc 269 F 2d 806, 808-809 (7th Cir 2001).
 Selective Disclosure and Insider Trading, Release No 33-7881 (15 August 2000) [65 Fed Reg 51716 (24 August 2000) (codified at 17 CFR Part 243)].
 US v Chiarella 445 US 222 (1980) 232-234.
 See cases cited in Donald C Langevoort, Insider Trading Regulation, Enforcement, and Prevention (Thomson Reuters May 2021 Update) § 3:6 fn 6.
 F 2d 407, 411-413 (1983).
This post comes to us from Lance Ang, the 1912 Senior Scholar at Fitzwilliam College, University of Cambridge. It is based on his recent article, “The Regulation of Share Buybacks and Insider Dealing: A Comparative Analysis,” available here.