Donegan says, “The rule is actually quite restrictive. It is designed in such a way that the company cannot make multiple trades through multiple brokers and try to increase the share price. “These are the rules of 10b-18: there are several reasons why companies have bought back their shares at record rates. First of all, Wall Street loves share buybacks. A share buyback reduces the number of shares outstanding. As a result, profit increases divided by outstanding shares — earnings per share. This increases the value of the share for the remaining shareholders. Share buybacks are actually an investment in their own shares. In theory at least, management will only buy shares if it expects to increase shareholder value in this way more strongly than by using cash for investments, acquisitions or dividend distributions, which would trigger taxes for dividend recipients. Things are starting to get difficult at this point due to the extent of the company`s share buyback rules. The safest procedure for CSOs or others making a redemption is to follow the guidelines of Rule 10b-18 of the 1934 Act – Purchases of Certain Equity Securities by the Issuer and Others. Technically, Rule 10b-18 provides a safe haven only for the repurchase of common shares. In practice, it is often used as a guideline for buybacks of other securities.
Assuming that no outstanding developments prevent a buyout and that the company`s legal counsel gives his blessing, the next step for the management that manages the program is to obtain the approval of the board of directors. This authorization should indicate both a purchase limit in dollars or shares and a schedule, for example; 5 million $US over one year, 3% of the shares outstanding over the next six months or half a million shares before the end of the year. After the board of directors has made its decision, the company is expected to issue a press release detailing the program. If a redemption takes place, it is because the seller has agreed, before the sale, that he or she will buy back a valuable property from the buyer. The object of the value can be equipment, real estate, an insurance transaction or any other object. “It`s important for a CFO to be sure that the brokerage firm is aware of the rules,” says Donegan. “The CFO might consider telling the broker in writing that the buyback program must be conducted in accordance with Rule 10b-18, and y anyone is the restrictions.” While brokerage firms are aware of the provisions of Rule 10b-18 and should be responsible for compliance with the provisions of Rule 10b-18, it would be premature to assume that all persons are equally experts with all brokerage firms. Stock price manipulation has been on the part of regulators since the Securities Exchange Act of 1934 attempted to prevent market manipulation by issuers, senior executives and directors,” said Susan M. Barnard, a securities lawyer at Sullivan and Worcester, LLP, Boston.