Share Buyback Programmes: Economic Function and Legal Issues

Share buyback programmes, traditionally characteristic of the US market, have recently become widespread in most European markets as a shareholder remuneration system supplementary to traditional dividend distributions. These programmes have been criticised by many, who consider the use of a company's resources to acquire its own shares unproductive, and point to an underlying conflict of interests on the part of the directors. But these programmes serve an economic function for companies with excess liquidity but a temporary lack of profitable growth or investment opportunities, who by means of the buyback can return cash to their shareholders. They also allow companies to efficiently manage their capital structure when, for whatever reason, companies would benefit from a reduction in the number of shares. And they offer significant advantages compared to dividends, as a result of their greater flexibility. The increasing prevalence of these programmes also owes much to their express regulation in the Market Abuse Regulation (EU) 596/2014, which provides a safe harbour from prohibitions on insider dealing and market manipulation for such programmes.

In a recent paper, I analyse the economic role of repurchase programmes and the main legal issues they raise, with a special focus on the conditions required for the application of the safe harbour. I argue that the insider dealing exemption is actually limited in content, referring only to the information specific to the programme itself, not to any other inside information available to the issuer. By contrast, the protection against price manipulation provisions is more significant, and the practical effect most commonly sought by issuers, as a consequence of the uncertainty that has traditionally accompanied the trading by a company of its own shares from the perspective of market integrity.

Although the safe harbour is subject to various requirements under the Market Abuse Regulation and Commission Delegated Regulation (EU) 2016/1052, it is those requirements that limit buyback programmes in matters such as trading volume and price fixing that in principle allow the risk of market manipulation to be ruled out.

The safe harbour is also subject to a causal or purpose-based requirement, which makes the legal exemption conditional on the issuer acquiring its own shares for certain limited purposes (ie a capital reduction, remuneration plans with delivery of shares for directors and employees, and obligations derived from instruments exchangeable into equity). But I argue that this purpose-based requirement is inconsistent with the material corporate regulation of these transactions, which generally allows companies to acquire their own shares for any reason and does not limit or discriminate between the different purposes that may be behind the transaction. This requirement is also irrelevant from the perspective of possible market manipulation, since it is a risk linked to the operating conditions that the issuer applies to the acquisition of its own shares and not so much to the subjective reasons that motivate it to do so. For these reasons, it is possible to defend  the legality of buyback programmes carried out for purposes other than those expressly provided for by MAR (for example, to use the own shares as consideration in an acquisition or merger transaction with another company) and even the validity of transactions involving own shares that an issuer carries out outside any formalised programme, provided that the aforementioned trading conditions are met.

Javier García de Enterría is Professor of Commercial and Corporate Law (CUNEF) and Consultant (and former partner) of Clifford Chance.

The full paper is available here.