The growing impact of the coronavirus worldwide, the drop in oil prices and other related issues have led to European and global financial markets witnessing market prices at a historic low last week. In response, the eight largest banks in the US have announced that they have collectively suspended their share buyback programmes until the end of June 2020. They will instead use their cash to provide support to the economy, by providing loans and other services. Companies in Europe are also reviewing their share buyback programmes following the recent market volatility. We see that companies are either investigating an acceleration of the programme to take advantage of low share prices, or a suspension or deceleration to retain cash for potentially difficult times ahead. This has led to a number of questions from clients, which we address in this article.
Most share buyback programmes of European listed companies are executed within the parameters of the safe harbour under the European Market Abuse Regulation (MAR) and the corresponding Delegated Regulation 2016/1052. Banks are usually engaged to perform share purchases on a discretionary basis, within the scope of the mandate agreed in an engagement letter. To be able to benefit from the MAR safe harbour, companies must issue a press release before the start of the programme, stating the purpose and duration of the programme, and the maximum amount and number of shares to be purchased. Depending on its size, the programme may be divided into several tranches, with a separate mandate being provided to a bank at the start of each tranche. The separate tranches are not usually announced publicly. We have been asked in recent days whether ongoing mandates with banks for share buybacks can be amended or terminated. Some aspects to keep in mind are explained below.
The engagement letter that has been signed with the bank will first need to be reviewed to assess whether the terms of the mandate allow early termination or amendment and, if so, at what cost (if any). If the terms do not allow this, the cooperation of the bank will be needed for any change to the mandate.
An important question is whether the company is in possession of inside information within the meaning of the MAR. In the current circumstances, this is also a difficult question as the impact of the coronavirus and other market circumstances is significant on almost all listed companies, but at the same time may differ between peers.
If inside information exists, the company will have to carefully assess whether this inside information plays a role in the amendment or termination of a specific share buyback mandate. If this is likely to be the case, the company will either need to refrain from making any changes to the mandate or first make the inside information public before proceeding to amend the mandate.
Bank engagement letters often provide that the engagement cannot be terminated or amended during closed periods, irrespective of whether any inside information exists or whether the information is used. Such a contractual provision goes beyond the requirements that apply under the MAR. To retain maximum flexibility, we recommend trying to negotiate away from such a provision at the start of the engagement.
Any change to information on the share buyback that has been previously disclosed publicly, including the size and duration of the programme, will need to be made public. The MAR also requires all other changes to the programme to be made public. We interpret this as meaning that all changes which are relevant for investors and/or may have an impact on trading, will need to be disclosed as well.
Since details of separate tranches are usually not disclosed, any change to a tranche would not necessarily need to be made public as long as the parameters of the overall programme do not change. If, however, the suspension of a tranche effectively means that the maximum programme size can no longer be reached within the announced programme duration, or if the acceleration of a tranche effectively means that the programme duration will be significantly shorter, this could trigger the obligation to disclose such suspension or acceleration through a press release.
We recommend preparing a communications strategy, including Q&As, to anticipate a press release having to be published, but also to prepare for cases where no press release is published. This is because share repurchases are made public on a weekly basis and any changes in the previous repurchase pattern may raise questions.
When increasing the size of the programme, companies should verify whether the share buyback will still fall within the share repurchase authorisation given by the general meeting. And if the programme is accelerated, they should assess whether the repurchased shares will not exceed any maximum which may have been set by the general meeting for holding shares in their own capital. Repurchased shares can be cancelled to make room for more share repurchases (to the extent allowed under the general meeting’s authorisation), but cancelling shares takes time due to a two-month creditor opposition period having to be observed. Share cancellations must therefore be planned carefully.
Please contact our Capital Markets experts if you want to discuss any contemplated changes to your share buyback programme or to a separate tranche.
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