Issuer Share Repurchase Safe Harbor: SEC Proposes to Clarify and Modernize Rule 10b-18

Sullivan & Cromwell LLP - February 4, 2010

The SEC has proposed amendments to Rule 10b-18, which provides issuers with a safe harbor from liability for manipulation when they repurchase their common stock in the market according to the Rule’s conditions. The Rule has four conditions, relating to manner of purchase, timing, purchase price and volume. The SEC proposes the following amendments to the Rule:

  • The time of purchase condition, which currently requires that a Rule 10b-18 purchase not be the opening purchase for the security in the consolidated system, would be modified to require that it also not be the opening purchase in the principal market for the security or in the market where the purchase is effected;
  • The price condition, which currently requires that a Rule 10b-18 purchase be made at a price no higher than the highest independent bid or the last independent sale price (whichever is higher), would be modified to permit a Rule 10b-18 purchase to be made on any trading day at a volume-weighted average price (“VWAP”) for the day, provided, among other things, that the security has an average daily trading volume (“ADTV”) of at least $1 million, the trade is entered into before the opening of the market, and the purchase does not exceed 10% of the ADTV for the security;
  • Whereas failure to meet the conditions of the Rule with respect to any purchase on a given day currently disqualifies all the issuer’s purchases during that day, the Rule would be amended to provide that failure to comply with the pricing condition solely because of a “flickering quote” would disqualify only that purchase; and
  • The merger exclusion, which generally bars reliance on the Rule following the announcement of a stock merger or similar transaction until the target shareholders have voted, would be extended with regard to a special purpose acquisition company (“SPAC”) until both the target shareholders and the SPAC shareholders have voted.

The SEC is seeking comment on the proposed changes and on an additional exception the SEC is considering but has not yet proposed, for purchases made using alternative passive pricing systems. The SEC has also asked for comments on a number of specific questions relating to the operation of Rule 10b-18. Comments are due on March 1, 2010.