Rulemaking Petition Seeks To Rein In Stock Buybacks

Author:Mr Cydney Posner
Profession:Cooley LLP

Almost 20 organizations, including the AFL-CIO and nonprofit consumer advocacy group Public Citizen, have filed a rulemaking petition with SEC "to revise Rule 10b-18 to curb manipulative practices by firms and encourage corporations to fairly compensate American workers." In essence, the petition seeks to repeal Rule 10b-18 and requests that the SEC "undertake a rulemaking to develop a more comprehensive framework for regulating stock repurchase programs that would deter manipulation and protect American workers." In light of the almost—dare I say it—"bipartisan" interest in reviewing the practice of stock buybacks, will the SEC decide that it's worth taking a look?

As you know, Rule 10b-18 provides a "safe harbor" from liability for "manipulation" under the Exchange Act where a company conducts a stock repurchase program in conformity with the Rule's volume, manner, price and timing conditions. As described in the petition, the SEC intended the Rule to be "a scheme of regulation that limits the ability of an issuer *** to control the price of the issuer's securities." The petition characterizes the impact of adoption of the Rule in 1982 as giving rise to "a sea change in corporate finance, after which stock repurchases became more common. Prior to its adoption, repurchase programs were relatively rare due to the threat of a manipulation charge; after the Rule took effect, the aggregate value of stock repurchases rose significantly."

And, after the enactment of the recent Tax Cuts and Jobs Act, the use of buybacks "skyrocketed": according to the petition, in 2018, "the first full year after the tax cut, repurchases surged 64 percent over the previous year and topped $1 trillion overall. Yet real wages for typical workers remained flat." Although the tax bill "provided significant tax benefits to large corporations, such as a lower corporate tax rate and an incentive to repatriate offshore cash," instead of raising wages, as was widely touted by those promoting the bill, companies "raced to repurchase their own stock[, leading] to a 64 percent increase in stock repurchases while real wages for workers remained flat. Indeed, analysts estimate that in 2018 corporations used nearly 60 percent of their corporate tax cut to repurchase stock. In other words, at a time when wages for average workers have failed to keep up with inflation, corporations have used the corporate tax break to collectively pay $1 trillion to executives, boards of directors, and large share sellers. Instead firms could dedicate this capital to worker wages, training, hiring, and other investments necessary for innovation and growth."


As discussed in this article in The Atlantic, while many companies are now publicly expressing support for many social causes, "[w]hen it comes to how businesses treat their employees,... that same enthusiasm for equality and progress is often nowhere to be found. Wage stagnation persists even as American corporations' profits grow, and the gig economy has made it difficult for many workers to take comfort in the basics of traditional employment, such as economic stability and access to health care. Meaningfully raising wages and improving benefits for employees at the expense of profits can feel like the third rail of American enterprise."

But hear this from what might seem to be an unlikely source, the Chairman of the U.S. Chamber of Commerce: "'Milton Friedman says businesses should only make money, and I just disagree with that....You've got to serve customers. You've got to make money, because that's one of the things you get paid to do. But you've also got to create jobs and improve our communities....The shareholder thing, I think that's completely crap, to be honest. The noisiest ones are the ones who are in and out; they're trading all the time, and you just have to ignore them....You don't get paid to run a business to take orders, you get paid to run a company.'"

Of course, he is referring...

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