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Monday, June 19, 2006 10:10:53 AM
Rule 10b-18 applies to bids for and purchases of an issuer's common stock by or for an issuer.7 Purchases of any other type of security are not covered ? even if related to the common stock (e.g., preferred stock, warrants, rights, convertible debt securities, options, or security futures products).8 Because Rule 10b-18 is not intended to apply in contexts where the issuer has a heightened incentive to manipulate the market price of its securities, the safe harbor excludes issuer bids and purchases made during certain corporate events, for example, during mergers, tender offers, and distributions that involve the issuer.9 The safe harbor also does not confer absolute protection from all liability for purchases (e.g. , purchases that are part of a plan or scheme to evade the federal securities laws) ? even if made in technical compliance with the Rule.10 Rather, the safe harbor provides only that certain, specific provisions of the securities laws will not be considered to have been violated solely by reason of the manner, timing, price, or volume of such repurchases, provided that the repurchases are made within the limitations of the Rule.
C. Conditions of the Current Rule
Rule 10b-18 provides a safe harbor for purchases on a given day. To come within the safe harbor for that day, an issuer must satisfy the Rule's manner, timing, price, and volume conditions when purchasing its own common stock in the market.11 Failure to meet any one of the four conditions will disqualify the issuer's purchases from the safe harbor for that day.
1. Manner of Purchase Condition
The manner of purchase condition requires an issuer to use a single broker or dealer per day to bid for or purchase its common stock. This requirement is intended to avoid the appearance of widespread trading in a security that could result if the issuer uses many brokers or dealers to repurchase its stock.12 The "single broker or dealer" condition, however, applies only to Rule 10b-18 purchases that are "solicited" by or on behalf of the issuer. Accordingly, the issuer may purchase shares from more than one broker or dealer if the issuer does not solicit the transactions. An issuer must evaluate whether a transaction is "solicited" by or on behalf of the issuer, depending on the facts and circumstances of each case.13
Moreover, where an issuer engages a single coordinating broker or dealer to make its Rule 10b-18 purchases, the broker or dealer can make (consistent with the single broker or dealer condition) appropriate and customary arrangements with other brokers or dealers, including exchange specialists, or "two-dollar" brokers on exchange floors to execute repurchases.14
2. Timing Condition
The timing condition restricts the periods during which the issuer may bid for or purchase its common stock. Currently, this condition excludes from the safe harbor purchases at the opening and during the last half hour of trading because market activity at such times is considered to be a significant indicator of the direction of trading, the strength of demand, and the current market value of the security.15 Therefore, where there is no independent opening transaction on a given trading day, the issuer is precluded from making purchases under the safe harbor for that day.
3. Price Condition
The price condition specifies the highest price an issuer may bid or pay for its common stock.16 Rule 10b-18's current price limitations vary depending on whether the security is a "reported," "exchange-traded," "Nasdaq," or "other security," (as defined under the current Rule) and whether the bid or purchase is effected on an exchange.17 The price condition is intended to prevent the issuer from leading the market for the security through its repurchases by limiting the issuer to bidding for or buying its security at a price that is no higher than the highest independent published bid or last independent transaction price. As such, the price condition uses an independent reference price that has not been set or influenced by the issuer but, instead, is based on independent market forces.
4. Volume Condition
The volume condition limits the amount of securities an issuer may repurchase in the market in a single day. The volume condition is designed to prevent an issuer from dominating the market for its securities through substantial purchasing activity.18 An issuer dominating the market for its securities in this way can mislead investors about the integrity of the securities market as an independent pricing mechanism.19
Under the current volume condition, an issuer may effect daily purchases in an amount up to 25% of the ADTV in its shares (the "25% volume limitation").20 However, the current 25% volume limitation does not include an issuer's block purchases. Moreover, an issuer's block purchases are not included in determining a security's four-week ADTV under the Rule.21 The current Rule defines a "block" as a quantity of stock that either: (i) has a purchase price of $200,000 or more; or (ii) is at least 5,000 shares and has a purchase price of at least $50,000; or (iii) is at least 20 round lots of the security and totals 150 percent or more of the trading volume for that security or, in the event that trading volume data are unavailable, is at least 20 round lots of the security and totals at least one-tenth of one percent (.001) of the outstanding shares of the security, exclusive of any shares owned by any affiliate.22
The definition also provides that a block does not include any amount a broker or dealer, acting for its own account, has accumulated for the purpose of selling to the issuer, if the issuer knows or has reason to know that such amount was accumulated for such purpose. The definition also excludes any amount that a broker or dealer has sold short to the issuer, if the issuer knows or has reason to know that the sale was a short sale.
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