Corporate share repurchases hit record levels in 2021. But as discussed in the following guest post by Sarah Abrams and Bret Hilgart, share repurchases can sometimes result in litigation and share repurchases could have important implications for directors and officers’ liability. Sarah is Head of Professional Liability at Bowhead Specialty Underwriters and Bret is Head of Commercial D&O at Bowhead Specialty Underwriters. I would like to thank Sarah and Bret for allowing me to publish their article as a guest post on this site. I welcome guest posts from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah and Bret’s article.
The recent uptick in Shareholder Litigation surrounding Share Repurchase Programs results in various considerations for Board of Directors and Company Management. Approval and oversight by the board in determining share repurchases may lead to potential conflicts of interest. In addition, existing reporting requirements, the SEC focus on insider trading and recent filing recommendations warrant examination.
Share Repurchase programs refer to a public company buying back company shares that were previously sold to the public. A company may choose to repurchase shares to send a market signal that its stock price is currently undervalued, to inflate financial metrics denominated by the number of shares outstanding, to attempt to halt a declining stock price, or simply because it wants to increase its own equity stake in the company.[i] Company management often describe the options for return of excess capital to shareholders as acquisition or capital expenditures to grow the business, issuance of a dividend, or share repurchase.
Notably, a repurchase program is often framed as a return of money to shareholders. The idea being that share buybacks are creating buying pressure while providing liquidity (and that buying pressure is elevating the share price) and/or reducing the number of shares so that price will rise due to the impact on valuation multiples. In the wake of COVID-19, many publicly traded companies repurchased or announced plans to repurchase shares. Management and boards of directors overseeing companies with significant cash stockpiles contemplated the current stock market valuations and determined share repurchase to be the most productive use of their cash.
Share repurchases are often framed as beneficial because they come with a greater degree of flexibility instead of the perceived commitment of a regular dividend. The success of the plan is somewhat dependent on the efficiency in the market, or at least in the trading of the issuer’s shares. If the value is on a per share basis and the share count goes down, the price goes up. The company is thus returning capital to all shareholders by providing liquidity to those interested in selling as well as lifting the value per share for those holding.
Read the full article on The D&O Diary.