Rethinking share repurchases

Key points

• Share buybacks have been widely used around the world for some time now. While the financial arguments for and against stock repurchases are still in the balance, there may be legal restrictions with respect to market abuse and capital maintenance, as was once the case in the USA and still is in the UK.
• A recent Singapore decision suggested that buybacks to counter a short-selling attack may constitute market manipulation and this was reflected in a Singapore Exchange warning to listed companies against both insider trading and market manipulation with share repurchases. It was suggested that companies should look to repurchase their shares at the lowest price possible and also not at the close of the trading day. Empirical evidence supports those concerns.
• Aside from securities regulation, many Commonwealth jurisdictions including Singapore and the UK, and the EU, continue to have corporate law rules on capital maintenance. The most important of these is the need for a solvency statement when a buyback is out of capital. However, there is the possibility of further relaxation of these rules in favour of the American position, which relies on fraudulent conveyance rules to control the process. But, while strictly unnecessary, the reality is that those rules are in turn usually dependent on a finding of insolvency, which in today’s climate is hard to prove ex post (and conversely costly to show ex ante with solvency statements).
• It is suggested that the proper purpose rule, which requires directors to use powers that they have been given fairly when it comes to internal changes to the constitutional balance within a corporation, can explain the basis for existing securities regulation and capital maintenance rules. But even where these specific rules do not exist, it can provide guidance in the area of share buybacks generally, and buttress fraudulent conveyance rules.
• The duty to act properly towards the ‘reasonable shareholder’ with respect to share repurchases is to buyback at the lowest possible price in the market when the company does not require funding given present needs and future exigencies. This seeks to maintain the priority structures that have allowed the company to succeed more than other business vehicles, and is different from present day talk of corporate purposes which may be too indeterminate.