The Securities and Exchange Commission (the “SEC”) has proposed amendments to Rule 10b-18 (the “Rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”), which provides issuers with a “safe harbor” from liability for manipulation when they repurchase their common stock, in accordance with certain conditions on the manner, timing, price and volume of the repurchase. According to the SEC, the proposed amendments are designed to clarify and modernize Rule 10b-18 in light of market developments over the past several decades.
EXPANSION OF RESTRICTIONS ON MARKET OPENING PURCHASES
Under the current Rule, the safe harbor does not extend to days when an issuer’s purchase is the opening (regular way) purchase reported in the consolidated system. An issuer’s purchase would, however, be covered under the safe harbor when the issuer’s purchase is the opening purchase in the principal market for its security, and the opening purchase in the market where the purchase is effected, provided there is already an opening purchase reported in the consolidated system that day. The proposed amendments would expand the exclusion to also preclude Rule 10b-18 purchases as the opening purchase in the principal market for the security and in the market where the purchase is effected.
ALLOWANCE OF CERTAIN VWAP TRANSACTIONS
Under the current Rule, an issuer is limited to bidding for acquiring its security at a price that is no higher than the highest independent bid or last independent transaction price, whichever is higher, quoted or reported in the consolidated system at the time the purchase is effected. The SEC is proposing to relax this standard and allow issuers to make repurchases of their securities on a volume-weighted average price (“VWAP”) basis. To qualify for the proposed exception, the following conditions must be satisfied:
- The purchased security must have an average daily trading volume (“ADTV”) of $1 million or more and a public float value of $150 million or more;
- The purchase must be entered into or matched before the opening of the regular trading session;
- The execution price of the VWAP matched must be determined based on a full trading day’s volume;
- The purchase can not exceed 10% of the security’s ADTV;
- The purchase must not be effected for the purpose of creating actual, or apparent, active trading in or otherwise affecting the price of any security;
- The VWAP must be calculated on the basis of every regular way trade reported in the consolidated system effected in accordance with the Rule’s timing and price conditions; and
- The purchase is reported using a special VWAP trade modifier.
PARTIAL RELIEF FOR NONCOMPLIANCE RESULTING FROM “FLICKERING QUOTES”
Under the current Rule, the failure to meet any of the manner, timing, price or volume limitations with respect to any of the issuer’s purchases during a day will disqualify all of the issuer’s Rule 10b-18 purchases from the safe harbor for that day. The SEC is proposing to limit the disqualification for the Rule’s safe harbor where an issuer’s repurchase order is entered in accordance with the Rule’s four conditions but is, immediately thereafter, executed outside of the price condition solely due to rapid and repeated changes in the current national best bid during the period between the identification of the current national best bid and the execution or display of the Rule 10b-18 bid or purchase (“flickering quotes”). The SEC proposes to disqualify from reliance on the Rule 10b-18 safe harbor only the noncompliant purchase.
Extension of Merger Exclusion for SPACs
The SEC has also proposed to extend the merger exclusion in connection with an acquisition by a special purpose acquisition company (“SPAC”). Under the current Rule, purchases effected during the period from the time of public announcement of a merger, acquisition, or similar transaction involving a recapitalization until the earlier of the completion of such transaction or the vote of the target shareholders are excluded from the safe harbor provisions of the Rule. Under the proposed amendments, the time in which the safe harbor is unavailable would be extended until the earlier of the completion of such transaction or the completion of the vote by both the target shareholders and the SPAC shareholders.