The Next, Great, Corporate Scandal: Potential Liability of Corporations Engaged in Open Market, 10b-18 Buybacks; a Minority View; Case Histories; Summary of Published Studies; Direction of Future Research

Abstract

Abstract: In 2006, U.S. corporate stock buybacks by S&P 500 companies are expected to exceed $400 billion with 95% conducted through "open market" transactions. Buybacks now account for nearly 70% of corporate cash distributions, squeezing dividend growth. The growth, size and method of execution of buybacks have attracted the attention of academics and practitioners, and consensus on buyback governance risk is shifting. Financial studies indicate buybacks in the 1960's signaled improved future operating results and undervaluation, later were used to optimize capital structure, but now largely are offsets to executive options. The link of buybacks to option grants underscores the potential for governance review. Legal studies debate the propriety of buybacks, and litigators consider the potential for liability to attach to buybacks. Drafters of 10b-18 (buyback safe harbor) report no significant enforcement activity against firms engaged in stock buybacks, but, with governance consensus in flux, and with U.S. buyback regulations among the world's least restrictive, buyback programs should be reevaluated to assure conformance to changing standards of best practices.