Is it True That Companies Can't Buy Back Their Stock During the Last Half-Hour of the Day?
Original post by Cam Merritt of Demand Media
Changes in federal guidelines concerning a company buying back shares of its own stock have led to confusion over whether it's illegal to conduct such buybacks in the last half-hour of a trading day. While such activity used to prohibited, companies can buy back shares as late as the last 10 minutes of the trading day, but only if they meet certain criteria.
Companies frequently buy back shares of their own stock to take them out of circulation, reducing the supply and, with the goal of driving up the share price. This is a perfectly legal and legitimate strategy, as long as the company is open about the buyback and doesn't make it seem as if public demand for the stock is higher than it really is. The Securities Exchange Act of 1934 makes it illegal to create a "false or misleading appearance" about market demand for a security -- a practice known as manipulation. Companies engaged in buybacks sometimes encounter accusations of manipulation, so in 1982 the Securities and Exchange Commission issued Rule 10b-18, also called the safe harbor rule. This rule, if followed, offers a company legal protection against lawsuits alleging manipulation.
Under the original Rule 10b-18, companies gained protection from liability if their buybacks met four criteria. All shares that the company bought back on any particular day had to be bought from the same dealer or broker. The company could not pay more than market price for the shares. Third, the company's buyback couldn't account for more than 25 percent of all trading in the stock on any particular day. Finally, the company couldn't buy back any shares in the last 30 minutes of the trading day. This last requirement gave the market time to recognize and react to the buyback.
The SEC updated the safe-harbor rules in 2003. Now, a company can buy back its shares up until the last 10 minutes of the trading day, rather than the last half-hour, if it meets two conditions: The stock has an average daily trading volume of at least $1 million, and the "public float" value of the stock is at least $150 million. Public float refers to shares held by general investors, rather than company insiders and the company itself. The update to the rule assumes that such companies are visible enough that 10 minutes is adequate time for the market to react. Companies that don't meet these criteria are prohibited from buying back stock 30 minutes before the close of trading.
It's critical to understand that Rule 10b-18 is only a guideline, not a legal requirement. The rule itself flatly says that there is no presumption that a company is engaged in manipulation simply because it doesn't follow the safe harbor guidelines. Think of it like an immunization: Getting vaccinated prevents you from getting sick -- but failing to get vaccinated doesn't guarantee that you will get sick. It's the same with Rule 10b-18: Following the safe harbor guidelines offers protection from manipulation charges, but a company may still be able to successfully defend itself even if it doesn't follow the guidelines.
- Securities and Exchange Commission; Answers to Frequently Asked Questions Concerning Rule 10b-18; November 2004
- Investopedia: Rule 10b-18
- U.S. Code via Cornell University Legal Information Institute: Securities Exchange Act of 1934 - Manipulation of Security Prices
About the Author
Cam Merritt has been a professional writer and editor since 1992, specializing in articles about spectator sports, personal finance and law. He has produced content for "USA Today," "The Des Moines Register" and the "Better Homes and Gardens" family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.