New Regulatory Framework for Share Buy-backs

In a far-reaching revision of the Stock Exchange Act (SESTA), which entered into force on 1 May 2013, the prohibitions of insider trading and market manipulation were moved from the Penal Code (PC) into the SESTA. As the scope of the prohibitions is very broad, the Stock Exchange Ordinance (SESTO) has been amended to include certain safe harbor exemptions, in particular concerning share buy-back programs. By and large, these safe harbor rules mirror some of the rules developed by the Takeover Board (TOB) for share buy-backs and set out in former versions of TOB Circular No. 1. As the TOB consequently amended Circular No. 1 with the goal of eliminating duplications, the regulatory framework of buy-backs is now spread across TOB Circular No. 1, articles 33e–33f SESTA, articles 55b–55d SESTO, as well as the related FINMA Circular 2013/08 on Market Conduct Rules, and enforced by different authorities. Changes in substance include the publication and confirmation requirements or the elimination of the “safe harbour” exemption for public buy-back programs relating to less than 2% of the shares.

By Dieter Gericke / Vanessa Isler (Reference: CapLaw-2013-28)

1) Introduction

Prior to the introduction of the new framework, non-public buy-backs by listed companies needed to comply with certain rules of corporate law, but were otherwise hardly regulated. Publicly announced buy-backs have long since been deemed public offers for shares and therefore fell under takeover regulations and the authority of the TOB. Whether or not takeover rules could constitute an appropriate basis for the regulation of share buy-backs, has, however, always been controversial (cf. Dieter Gericke, Share Buy-back: Revision of Communication No.1, CapLaw 2009-41 and Idem, TOB Circular No.1: New Regulation of Share Buy-Back Transactions, Cap Law-2010-29). The legal basis for the regulation of buy-backs by the TOB in its Circular No. 1 was weak, in particular to the extent that its provisions aimed at avoiding market distortions in general and were less driven by concerns typical for a public offer for shares (equal treatment, etc.).

Accordingly, the transfer of provisions directed at regulating market behavior to the SESTA and, in particular, the SESTO, while TOB Circular No. 1 continues to regulate the public offer-aspects of an announced buy-back program, seems only logic. However, the tradition of regulation and supervision of buy-backs by the TOB was well-established and, on the whole, evolved with little practical problems. In contrast, today’s concept of dual regulations, with supervision split between the TOB and the Swiss Financial Market Supervisory Authority FINMA (FINMA) (cf. Luc Thévenoz, Dévelopements du droit Suisse des OPA, SZW 2013, 251), may unduly complicate the relatively straight-forward topic of share-buy backs and, specifically, announced share buy-back programs. Furthermore, there is still an overlap of certain rules, which are included in the SESTO as well as in the amended TOB Circular No. 1 and, accordingly, may lead to different paths of interpretation depending on the competent authority.

2) Three sets of rules, three enforcing authorities

In fact, despite the dual concept, three sets of rules, enforced by three different authorities will have to be taken into account in the future.

a) Administrative law prohibitions of insider trading and market manipulation

The new articles 33e and 33f SESTA provide for administrative law versions of the prohibition of insider trading and of market manipulation, respectively. Article 33f (2) (b) SESTA specifically advises the Federal Council to regulate permitted behavior in connection with share buy-back programs. This has been done with the new articles 55b–55d SESTO, observance of which provides a safe harbor of permitted behavior under both insider trading and market manipulation rules, even if the behavior would otherwise fall under the scope of the prohibitions. Enforcement of these prohibitions and supervision of compliance with the safe harbor rules lies in the hands of FINMA.

Like TOB Circular No. 1, the safe harbor set out in the SESTO is limited to publicly announced buy-back programs, while the prohibitions of insider trading and market manipulation in principle apply to any securities transaction, i.e. any buy-back of shares, including non-public repurchases of shares by an issuer. That said, there is no requirement to use the safe harbor. Rather, both non-public share purchases and share purchases within the framework of public buy-back programs that do no observe the safe harbor rules are permitted as long as they do not qualify as insider trading or market manipulation within the meaning of articles 33e and 33f SESTA.

With respect to share buy-backs outside the safe harbor, the new FINMA Circular 2013/08 on Market Conduct Rules of 29 August 2013 will play an important role. While the FINMA Circular is not a binding legal act, it sets out FINMA’s interpretation of the prohibition of insider trading and market manipulation. For example, it should be noted that FINMA’s view is extensive as to the scope of possible “insider” information, which according to FINMA also includes outside information not known to the company and its insiders and which has no impact on its intrinsic value (e.g. an analyst’s view or third party’s intention). So far, FINMA has not been willing to entertain the possibility of no-action letters or to determine the permissibility of intended transactions under the new regime, but has not excluded the implementation of such procedures in the future. Hopefully, with the FINMA Circular now in force (as of 1 October 2013), FINMA may be more open to such requests.

b) Criminal law prohibitions of insider trading and market manipulation

The new articles 40 and 40a SESTA set out the criminal law counterparts of the prohibition of insider trading and market manipulation. Formerly included in the PC, their wording has been adjusted to largely mirror the administrative law prohibitions. The criminal law prohibitions do not refer to the administrative law safe harbor established by the SESTO for public buy-back programs. While this is regrettable, clearly, a behavior, which the SESTO explicitly permits, cannot simultaneously qualify as a criminal offence (cf. article 14 PC). Therefore, it seems safe to say that the safe harbor defense can also be used in a criminal investigation.

As the criminal law prohibitions are investigated and prosecuted by the Federal Attorney General (and adjudicated in the Federal Criminal Court (article 44 SESTA)), it is in principle possible that the same buy-back program comes under scrutiny of FINMA and the Federal Attorney General in parallel. More likely, however, FINMA will open up an administrative investigation first and, if an administrative prohibition is found violated, may notify the criminal authorities of the matter. De facto, although with questionable authority to investigate into matters of potential market manipulation or insider trading, FINMA has already assumed this function in the past.

c) TOB Circular No. 1: Exemption from General Takeover Regulations

As mentioned above, a reduced version of TOB Circular No. 1 applies and – as in the past – sets out the conditions, under which a buy-back program can be exempt from the general takeover regulations set out in the SESTA and in the Takeover Ordinance (TOO).

The exemption is, in principle, available for public buy-back programs that do not exceed 10%, while the previous de minimis exemption for public purchases of less than 2% of the shares has been deleted.

In practice, the reporting procedure set out in the TOB Circular with a filing to the TOB and subsequent public notice (see below) is still the key element of any buy-back procedure. In contrast, as mentioned above, no clearance is required from FINMA under the SESTO safe harbor, nor does FINMA, in principle, accept a clearance filing for a buy-back program or other share buy-back. Since the safe harbor rules are now hardwired in the SESTO and no longer under the TOB’s control, the TOB is somewhat reluctant to issue exemptions that could be in conflict with the SESTO safe harbor. However, the TOB does, in principle, not need to take into account the SESTO safe harbor rules, except in cases of an obvious breach of the prohibition of insider trading or market manipulation. In addition, the TOB has explicit authority to approve exemptions from the buy-back volume restrictions set out in the SESTO and, in particular, to allow share buy-backs exceeding 10% of the share capital and voting rights or 20% of the freefloat or 25% of the average daily volume (article 55b (3) SESTO).

3) Categories of Exemptions and Procedures

a) TOB Reporting Procedure (Meldeverfahren)

As with the previous regime, the reporting procedure is applicable if the proposed share buy-back does not affect more than 10% of the share capital and the voting rights (TOB Circular No. 1 para. 11, article 55b (1) (b) and (2) (b) SESTO). In order to qualify for the reporting procedure, the buy-back program must satisfy a number of additional requirements (TOB Circular No. 1 paras. 8–15). The general tests required for the applicability of the reporting procedure have largely remained the same under the new regime:

  • The cancellation of the equity securities acquired in the course of the buy-back program may not lead to a significant change of control with the issuer, in particular by exceeding the thresholds of 331/3% or 50% of the voting rights. Whether lower de facto-controlling positions may be relevant is left open.
  • The total volume of the buy-back may not exceed 20% of the free-float. It is worth noting that TOB Circular No. 1 uses its own definition of free-float which is as follows: the free-float does not include equity securities of over 5% held by an investor directly, indirectly or in concert with third parties. The reference date for this calculation is the day on which the application is submitted to the TOB. The freefloat must be calculated separately for each category of equity securities covered by the buy-back program (TOB Circular No 1, para.12). Accordingly, the buy-back volume of companies with significant shareholder groups holding more than 5% in the shares may be limited. The legitimacy of the TOB’s concern with the liquidity of traded shares as witnessed by this requirement to the reporting procedure remains to be questionable (cf. Gericke, Share Buy-back, op. cit.).
  • The implementation of the buy-back program may not lead to the issuer falling below the minimum thresholds required for listing according to the rules of the relevant stock exchange. This requirement may not always be sensible, in particular with respect to companies that were granted exemptions from the minimum free-float requirements or failed to maintain them. Of course, the TOB may deviate from this requirement in specific cases.

If the proposed buy-back program complies with all requirements of chapters 1– 4 of TOB Circular No.1, the issuer may use the reporting procedure and report the program to the TOB (see TOB Circular No. 1, paras. 31– 34). Such reporting takes place by submitting the form provided by the TOB at least five trading days before the planned publication date of the buy-back. If the conditions for the exemption under the reporting procedure are deemed satisfied, the TOB confirms within three trading days that it has taken note of the buy-back program and that no formal decision by the TOB is required.

The fee levied by the TOB for the review of a buy-back program in the reporting procedure amounts to 0.5 per mill of the total value of the buy-back and is capped at CHF 20,000.

b) Regular Exemption Proceedings

If a buy-back program does not qualify for the reporting procedure, the issuer may, based on article 4 (2) TOO, submit a regular exemption application to the TOB (TOB Circular No.1, paras. 35–39) in addition to the applicable form (Meldung eines Rückkaufprogramms), wherein the issuer explains the reasons for the deviation from the requirements set out in the TOB Circular. The application must be submitted no later than 20 trading days prior to the launch of the buy-back program. The TOB then decides whether or not the buy-back program has to comply with any or all of the regular rules governing public offers for shares. The buy-back program may be launched no earlier than 10 trading days after the publication of the TOB’s formal decision.

4) Rules affecting public buy-back programs

Set out below are the applicable rules either pursuant to TOB Circular No. 1 or the SESTO safe harbor rule. As mentioned above, in principle, an issuer may deviate from those requirements which are only set out in the SESTO as part of the safe harbor rule, as long as such behavior does not qualify as insider trading or market manipulation. Deviations from requirements set out in TOB Circular No. 1 must be approved by the TOB in advance.

a) General rules for buy-backs based on the reporting procedure

In addition to the general eligibility requirements for the reporting procedure, a buyback program which has been cleared through the reporting procedure must satisfy additional requirements, in particular with regard to the principle of equal treatment:

  • The buy-back notice must state the purposes of the buy-back precisely and completely (TOB Circular No. 1, para. 8).
  • The buy-back program must extend to all categories of listed equity securities of the issuer (TOB Circular No. 1, para. 9). If the buy-back program is executed through stock exchange purchases, the issuer must place simultaneous bids for all categories of listed equity securities (TOB Circular No. 1, para. 22).
  • The issuer must ensure an adequate relationship of the prices offered for different categories of equity securities (TOB Circular No. 1, para. 14).
  • The issuer may not purchase equity securities for the purposes announced other than through the buy-back program (TOB Circular No. 1, para. 15). This provision has been criticized due to its restrictiveness and lack of basis in formal law and, therefore, may not be enforceable. It is advisable to phrase the purpose of the buyback program as narrowly as possible in order to avoid a prohibition of legitimate share purchases outside of the buy-back program. Share purchases effected outside of the buy-back program must be published on the issuer’s website together with the share purchases made within the program (TOB Circular No. 1, para. 27).

b) Special provisions for fixed-price offers and issuance of put options

Fixed price-offers and buy-back programs implemented through the issuance of put options may not be conditional and must provide for an offer period of at least 10 trading days (TOB Circular No. 1, paras. 16 and 17, article 55 (2) (a) SESTO). Additional requirements apply, in particular, with regard to the principle of equal treatment (TOB Circular No. 1, paras. 18 – 20):

  • If the issuer is unable to satisfy all acceptance declarations, it must satisfy them on a pro rata basis.
  • If during the period of a buy-back program the issuer acquires equity securities at a price exceeding the offer price, it must offer the higher price to all accepting shareholders (best price rule).

The issuer must publish the buy-backs made at the latest on the day following the expiry of the buy-back program (article 55b (2) (d) SESTO). No later than 3 trading days after the expiry of the buy-back program the issuer must submit a confirmation to the TOB regarding its compliance with the applicable requirements (TOB Circular No. 1, para. 14 –15, 18 –19) as well the required reporting (para. 27).

c) Special provisions for buy-back programs at market prices

The most common form of buy-back programs is the buy-back over the stock exchange, i.e. “at market prices”, usually using a second trading line (for withholding tax reasons). Buy-back programs at market prices may not last longer than 3 years (TOB Circular No. 1, para. 21 and article 55b (1) (a) SESTO). The TOB Circular No.1 (paras. 22–26) and the SESTO (article 55b SESTO) impose the following additional requirements:

– If the buy-back program extends to several categories of equity securities, the issuer must offer a bid price for each category at the same time (TOB Circular No. 1, para. 22).

– The scope of buy-backs on the regular trading line may not exceed 25% per day of the average daily volume traded during the 30 days prior to the publication of the buy-back program (article 55b (1) (c) SESTO). The TOB defines the average daily volume traded as the sum of transactions on the regular trading line both within and outside of the order book at the stock exchange divided by the number of trading days in the 30 calendar days before publication of the notice of buy-back (TOB Circular No. 1, para. 23a). This restriction can be an obstacle for companies whose shares have a low trading volume, as the permitted buy-back volume may result to be insignificant. In such case, the issuer has no other choice but to obtain an exemption from the TOB pursuant to article 55b (3) SESTO. As such exemption cannot be obtained in the reporting procedure, the issuer has to obtain formal approval pursuant to TOB Circular No. 1, para. 35 et seq.

  • The offer price may not exceed the last independently achieved closing price on the regular trading line or, if lower, the best currently available independent offer price on the regular trading line (article 55b (1) (d) SESTO).
  • Each purchase at market price must be reported to the TOB and the SIX Swiss Exchange and published on the issuer’s website no later than on the 5th day following such purchase (TOB Circular No. 1, paras. 27– 30, article 55b (1) (h) SESTO).

The treatment of black-out periods, during which share buy-backs are interrupted, remains the same as under the previous TOB Circular No. 1, but is now regulated in the SESTO. Black-out periods are defined as (i) the duration of a postponement of ad hoc publicity of price sensitive facts in accordance with the rules of the relevant stock exchange, (ii) the period of 10 trading days prior the release of financial results and (iii) whenever the last published consolidated accounts date back more than nine months (article 55c (1) SESTO). Purchases are nevertheless permitted if they are delegated to a bank or securities dealer which executes purchases without the issuer’s further influence within the parameters set by the issuer or, if the issuer is itself a securities dealer, a trading unit protected by information barriers (article 55c (2) SESTO). If the issuer delegates purchases to a bank or securities dealer, the investment parameters must be defined before the publication of the buy-back program and may be adjusted once a month. If the parameters are defined or adjusted during a black-out period as defined in article 55c (1) SESTO, the buy-back may only be carried out after a waiting period of 90 days (article 55c (3) SESTO).

It should be noted that the SIX Swiss Exchange’s regulations and practice concerning ad hoc publicity and the FINMA Circular 2013/08 on Market Conduct Rules are not aligned as regards the definitions and interpretations of significantly price-relevant fact and insider information. In particular, FINMA’s interpretation of insider information has a significantly broader scope. Accordingly, in order to be on the safe side, a buy-back program which is not executed by delegation to a bank or securities dealer in accordance with article 55c (2) SESTO may need to be interrupted even outside black-out periods pursuant to article 55c (1) SESTO.

The issuer must submit a confirmation to the TOB attesting compliance of its buy-back program with the applicable requirements (TOB Circular No. 1, para. 15), as well as the required reporting (TOB Circular No. 1, para. 27). In addition, the bank or securities dealer appointed to conduct the buy-back program must issue a separate confirmation to the TOB regarding the satisfaction of the requirements regarding the adequate offer price (TOB Circular No. 1, paras. 14 and 22) and scope of the buy-back (TOB Circular No. 1, paras. 23–23a). Both confirmations must be reported on the 3rd trading day after the expiry of the buy-back program and at least once every year.

5) Reporting Requirements

The revised buy-back regime requires the issuer to publish information on the purchase of equity securities within and outside of the buy-back program. The information has to be reported to the stock exchange and published on the issuer’s website on the 5th trading day following the transaction at the latest (TOB Circular No. 1, paras. 27–30, article 55b (1) (h) SESTO). The information must be available on the website for at least twelve months after the end of the buy-back program (TOB Circular No. 1, para. 27a, article 55b (1) (g) SESTO).

A sale of equity securities during a buy-back program other than for purposes of an employee participation plan has to be reported to the stock exchange on the trading day following the transaction and published by the issuer on the 5th trading day. Such sale may per day not exceed 5% of the average daily trading volume on the regular trading line during the 30 days prior to publication of the buy-back program (see 4 c) above concerning the calculation).

As a public buy-back program is deemed a public offer for shares, in principle, the issuer’s reporting obligations under article 20 SESTA are suspended for the duration of the program (article 19 para. 1 of the FINMA Stock Exchange Ordinance (SESTO-FINMA)). After closure of the program, a reporting in accordance with article 20 SESTA has to be made (article 19 (2) SESTO-FINMA). It may, however, be advisable to continue reporting during the program, also under article 20 SESTA, given the difficulty of correct application of this exemption.

6) 10%-limitation of article 659 Code of Obligations (CO)

In the past, there has been some confusion with regard to the TOB’s review of the issuers’ compliance with the 10% limitation according to article 659 CO. The revised TOB Circular No. 1 now clearly states that an exemption granted with regard to takeover law does not exempt the issuer from adhering to the CO, which is, however, not reviewed by the TOB (TOB Circular No. 1, para. 7). The interpretation and application of article 659 CO are within the competence of the civil courts.

7) Conclusions and Outlook

Despite the new system of dual regulation, substantively, the new buy-back regime has largely remained the same. That share buy-backs are now regulated by two different bodies, FINMA and the TOB, and the rules enforced by three different authorities is regrettable, but it remains to be seen to what extent this will lead to actual conflicts.

The new framework will pose some challenges to issuers in getting an overview of applicable rules and to comply with the standards and practices of three different authorities, and requires more coordination among the authorities themselves. The improvement of systematic consistency with regard to the regulatory scope of the different authorities achieved thereby and an improved legal basis in formal legislative acts, offers some, but perhaps not sufficient justification for these complications.

Generally, it remains to be hoped that the new competences of FINMA, in parallel with the criminal authorities, will not lead to a tendency of criminalization of minor breaches of regulations governing share buy-backs as seen in other areas of capital markets regulations.