Harvey J. Goldschmid, General Counsel at the SEC, says that corporate executive share buybacks with inside material information can disrupt „market integrity.“ (PHOTO BY DENNIS BRACK/ BLACK STAR) The company cannot buy on the opening market on the NASDAQ National Market or during the last half hour of the planned trade. One of the most striking reasons for the growth of these programs is to offset the dilutive effects of generous stock bonus packages on employees, including stock options and equity contributions on 401 (k) programs. Earnings are „diluted“ when the number of shares outstanding increases, which reduces earnings per share. As successful companies issue new shares to reward their employees, other shareholders` earnings per share are inevitably diluted. What is inside information? It`s not easy to recognize — ask your company`s business advisor. But if the information has not been made public and you think the action could move if it were, it is probably qualified. Financial managers have regular access to this information at an early stage. In order to create a level playing field, the law of listed securities companies requires that all essential transaction information be disclosed. What makes information „essential“? This answer is not clear either, but if it can affect the result from 3% to 5% or more or move the action, it is likely.
When a company acts on such information before it is made public, but has a significant advantage over other investors, it violates U.S. law. Companies should seek a formal agreement with their broker for each buyback program. Most brokerage firms have a standard that covers the strengths of Rule 10b-18 and determines who will be responsible for what on each side. The equestrian panel at Salomon Smith Barney has a standard agreement that contains the following clauses: „So if there is a large portion of the shares – and these are often privately traded trades that are not on the market – it is not within the volume limit,“ Donegan says. The idea is that there is no possibility of market manipulation if the company buys a large block from a shareholder. If such a large bloc were to be launched on the open market, this would likely result in an imbalance in supply demand and would force the share price to fall. It would not be good for other investors. There are several reasons why companies have repurchased their shares at record rates. First of all, Wall Street likes share buybacks.