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Message: Re: PTSC could have bought every share traded today for less than $100k/Cautious
Stock Buybacks: The Rules
Journal article by Ed Mccarthy; Journal of Accountancy, Vol. 187, 1999
Journal Article Excerpt
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Stock buybacks: the rules.
by Ed McCarthy
Toeing the line on the inside track. EXECUTIVE SUMMARY * STOCK REPURCHASE PROGRAMS CAN POSE PROBLEMS for financial executives because they may raise concerns at the SEC about insider information and stock manipulation. * IF THE COMPANY HAS MATERIAL INFORMATION that has not been made public it should not buy back stock. * BOARD AUTHORIZATION FOR PURCHASE OF that company's stock for the corporate treasury should specify: * The maximum amount of money to be spent, or the maximum number of shares to be acquired. * The rationale for the program. * The time period covered. * GETTING A WRITTEN AGREEMENT from the broker that the program will follow SEC Rule 10b-18 is a good idea. It should specify that: * The company and affiliated purchasers may work with only one broker or dealer on any single day. * The company may not buy on the opening trade on the NASDAQ National Market or during the last half hour of scheduled trading. * The company's purchase or bid price may not exceed the highest current independent bid quote or last independent sale price, whichever is higher. * The company must stay within trading volume restrictions unless it is doing a block trade. * CHECK THE BROKER'S EXECUTION of the purchases. Make sure you obtained a good price. Is your company planning to buy back publicly held stock? If so, it's not alone. In 1998, U.S. corporations announced plans to buy a record-setting $220-billion worth of their own shares, according to Securities Data Co., Newark, New Jersey. But CPAs and other financial executives who administer repurchase programs can't just pick up the phone and place an order with a broker to buy treasury stock, especially if they know that the company's earnings will soar or that it will soon announce a strategic decision apt to be popular on Wall Street. They are insiders, and as such, face tough insider information rules. Here's how to execute a buyback program at a good price with the SEC'S blessing. What is inside information exactly? That's not easy to pin down--ask your company's corporate counsel. But if the information hasn't been disclosed publicly and you think the stock might move if it were, it probably qualifies. Financial executives routinely have early access to such information. To level the playing field, securities law requires publicly traded companies to disclose any material information about operations. What makes information "material"? That answer is not clear-cut either, but if it can affect earnings by 3% to 5% or more or can move the stock, it probably is. If a company acts on such information before it is released to the public, however--exercising a distinct advantage over other investors--it violates U.S. law. "The integrity of the markets is disturbed if insiders, including managers in a company, purchase shares on the basis of material information," says Harvey J. Goldschmid, general counsel of the SEC in Washington, D.C. That applies whether the insider purchases stock for his own account or for the company. "Think of a situation where a company went into the market knowing that the shares soon would double in value due to a discovery--without telling shareholders about the discovery. That creates a kind of unfairness that is traditionally considered fraudulent." Share-price manipulation has concerned regulators since the "Securities Exchange Act of 1934 attempted to prevent manipulation of the market by issuers, officers and directors," says Susan M. Barnard, a securities-law attorney with Sullivan and Worcester, LLP, Boston. "Basically, the rules try to prevent a company-by virtue of going in and out of the market--from artificially inflating or deflating a stock's price." Companies that violate insider-trading laws risk incurring a range of costly penalties. Goldschmid points out that the potential remedies run from criminal sanctions, which include prison terms of up to 10 years, to triple-disgorgement penalties, in which the SEC seeks three times the amount of money made by the misuse of inside information. Other shareholders also have standing to sue a violator. WHY BUY BACK SHARES? There are several reasons why companies have been buying back their stock at record rates. First, Wall Street loves stock repurchases. A stock repurchase reduces the number of shares outstanding. Accordingly, earnings divided by shares outstanding--earnings-per-share--go up. That increases the value of the stock for the remaining shareholders. Share repurchases are, in effect, an investment in the company's own stock. At least in theory, management only repurchases stock if it expects to enhance shareholder value ...
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