Stock Buyback Programs in the Era of COVID-19 - Including Special Regulatory Considerations for Banks and Bank Holding Companies
In light of the ongoing coronavirus (COVID-19) pandemic, corporations face an increasingly difficult task: navigating the volatility of the financial markets and performance of the companies’ financial metrics (e.g., share price and earnings per share) while balancing initiatives that champion goodwill and sustainability on their behalf and on behalf of their key stakeholders. Stock buyback programs are a common tool used by corporations to manage volatility and seek to enhance stockholder value. In 2018 and 2019, corporations repurchased nearly $1.5 trillion of their own shares through stock buyback programs. These repurchases generally served to stabilize, even encourage, share prices and increased earnings per share. However, recent events have led to increased public scrutiny, both financially and politically, of the adoption and continuation of these programs, including from the highest levels of government. Accordingly, implementation and usage is down drastically— more than 35% in dollar volumes year-to-date.
If your corporation is considering the adoption or continuation of a stock buyback program, you should consider the following:
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Your Company’s Liquidity. Times are uncertain. You should carefully assess your company’s liquidity and capital needs prior to any sort of discretionary spending, particularly stock buyback programs. Many companies are prioritizing cash retention amid the current economic uncertainty, which has dried up revenue streams and caused widespread operational shutdowns. The effects of COVID-19 are likely to be prolonged and you must consider all potential effects on the short-term and long-term capital needs of your company.
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Public Perception of Your Company. Companies are facing intense scrutiny in the public and political arenas regarding stock buyback programs (including their past implementation and usage). Many critics even have called for the suspension of these programs altogether. You should consider the scrutiny that may follow and be prepared to defend your prior, current, and future actions with a sound rationale for the implementation or continued usage of the plan (particularly as it relates to the ongoing effects of COVID-19 on your stakeholders, notably your employees).
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Regulatory Prohibitions Applicable to Your Company. Certain loan programs under the Coronavirus Aid, Relief, and Economic Security (CARES Act) prohibit stock buybacks, among certain other corporate actions, for the duration of any loan issued under such programs and for the 12 months thereafter. This restriction applies only to companies that receive loans or guarantees under these programs. The limitation does not apply where the company had a contractual obligation to repurchase shares in effect on March 27 (the CARES Act enactment date), but the typical stock buyback program does not involve a “contractual obligation.” The Congressional Oversight Commission is tasked with regulating the actions of borrowers and intends to scrutinize their actions closely, including inquiries into whether repurchases occurred. Even though the Paycheck Protection Program established under the CARES Act does not prohibit borrowers from engaging in repurchases, such action by a loan or guarantee recipient is certain to attract unwanted attention. Critics could well ask why a company has taken advantage of a federal program intended to help small- to medium-sized businesses retain and pay their employees if the company has enough money to buy back equity from stockholders.
Accordingly, has your company accepted funds under the CARES Act? Is it possible that you will need to do so in the future? If “yes” to either, stock buyback programs are ill-advised at this time. -
Knowledge of Material Non-Public Information. The current climate is not “business as usual” and, therefore, you must carefully consider your decision in light of 17 C.F.R. § 240.10b-5. Repurchasing stock at the currently depressed prices of most companies could give rise to a claim that the company was purchasing on the basis of “material non-public information.” At this point, many public companies have not provided extensive disclosures of the impact of COVID-19 on their operations. This relates to not only your company’s performance relative to prior guidance or consensus estimates in Q1 2020, but also how the company is likely to perform in the next several quarters. Significant uncertainties exist as to how the crisis will continue to impact a company’s financial condition and results of operations, and the situation is changing rapidly. A company’s management team is likely to be in a better position than the investing public to understand and process the myriad of evolving information. This imbalance of access to information could be material.
Even if your company enters into a “pre-arranged trading plan” pursuant to 17 C.F.R. § 240.10b5-1, which permits a broker to execute a plan with an established formula or algorithm without involvement of your company’s personnel, you will be unable to rely on such a plan if the company were in possession of material non-public information at the time of adoption.
These same considerations militate in favor of substantial caution in any consideration of allowing purchases or sales of company stock by insiders. -
Stance of the Proxy Advisory Firms.
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In the case of Institutional Shareholder Services (ISS): It generally will support stock buyback programs, sans any regulatory prohibitions or concerns of the company, so long as customary terms are used and limitations followed. However, repurchases will be considered for purposes of its recommendations in 2021 (i.e., were the repurchases responsible?).
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In the case of Glass Lewis: The “pausing of buyback programs” has been referred to as a “forgone conclusion.” However, no official stances have been taken, other than noting that the firm does “not believe that discouraging pragmatism, discretion and context serves the interest of stockholders or companies—particularly during a crisis.”
Similar to your company’s public perception, you will need to be prepared to withstand the potential scrutiny of the proxy advisory firms and be prepared to defend your prior, current, and future actions with a sound rationale for the continued implementation and usage of the plan.
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Other Legal and Contractual Requirements. Regardless of COVID-19, do not forget that standard considerations apply. These include, among others, compliance with your debt covenants and with Regulation M (which seeks to prevent manipulative trading practices by issuers and others); any relevant corporate law restrictions on distributions (which includes repurchases), such as those provided under Section160 of the Delaware General Corporation Law or corresponding provisions of other state corporation codes; any relevant stock exchange notification requirements; and tax and accounting considerations.
In addition, companies engaged in repurchases are advised to comply with 17 C.F.R. § 240.10b-18, a safe harbor provision designed to ensure that company repurchases do not give rise to stock price manipulation on the basis of the manner, timing, price, and volume of repurchases. -
Demands of Your Stockholders and Stakeholders. As with the public and political scrutiny, you must be prepared to justify such actions to your stockholders and your stakeholders. There is a growing consensus that repurchase activity for the foreseeable future will decrease because it will be demanded by your stockholders and your stakeholders. In the instance of stockholders, you need to be able to answer how you are creating value otherwise and whether there are other opportunities to generate growth. In the instance of stakeholders, you should be prepared to explain if your actions benefit all employees and benefit your community at large.
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Special Regulatory Considerations for Banks and Bank Holding Companies. Banks and bank holding companies have additional considerations with respect to stock buyback programs. National banks are required to obtain approval of the Office of the Comptroller of the Currency as well as two-thirds of stockholders prior to commencing a buyback program, and state banks often face similar requirements under state law as well as the need to consult with the Federal Reserve Board or the Federal Deposit Insurance Corporation depending on whether the bank is a member or non-member institution. A bank holding company that is “well-capitalized” (both before and after the proposed repurchase), well-managed, and not the subject of any unresolved supervisory issues is generally permitted to repurchase shares without prior Federal Reserve approval. However, even when good economic conditions prevail it is advisable for bank holding companies to discuss their intention to conduct repurchases with their Federal Reserve contact in advance. Given the uncertain severity and duration of the current economic environment and potential heightened regulatory scrutiny surrounding stock repurchases and capital and liquidity matters generally, the need to discuss any proposed repurchase program with the Federal Reserve prior to commencement is greater than ever.