Guidelines on buy-backs of own shares and price stabilisation

Introduction

Section 3-12 of the Norwegian Securities Trading Act (the “STA”) implements the EU Commission Regulation (EC) No 2273/2003 on exemptions for buy-back programs and stabilisation of financial instruments in Norwegian law. Issuers with financial instruments listed on a regulated market must comply with the rules set out in the Commission Regulation when buying back their own shares. The Commission Regulation provides the conditions under which price stabilisation may be carried out, without conflicting with the rules on prohibition of market manipulation in Chapter 3 of the STA. Section 3-12 of the STA refers to the prohibition of market manipulation in Section 3-8, but does not refer to Section 3-3 on the misuse of inside information. However, the provisions of the Commission Regulation envisage that the safe harbour exemptions to a certain degree also apply to the prohibition on the misuse of inside information, cf. Article 6, No. 3 and the letter from the Financial Supervisory Authority of Norway (the “FSA”) dated 9 November 2006 (Ref. 06/7559).

Buy-backs of own shares and price stabilisation trades can fall within the rules prohibiting market manipulation and illegal use of inside information. Both buy-backs and price stabilisation can cause disturbance to the process of proper price formation in listed shares. Persons in an issuer may further be prohibited from participating in buy-backs of they possess inside information. The Commission Regulation stipulates the conditions under which it is lawful to carry out buy-backs and price stabilisation trades, even where such buy-backs or price stabilisation trades are in principle subject to the restrictions of Section 3-3 and Section 3-8 of the STA.

Buy-back programs and price stabilisation arrangements that meet the requirements of the Commission Regulation are commonly described as being subject to “safe harbour” exemptions. However, this does not mean that buy-backs of shares and price stabilisation carried out other than in accordance with the provisions of the Commission Regulation are unlawful, but such transactions must be evaluated on a case-by-case basis in terms of the rules on the prohibition of market abuse. As a general rule, Oslo Børs recommends a high degree of transparency if an issuer is considering any deviation from the requirements of the Commission Regulation.

The FSA is responsible for supervising compliance with the provisions on buy-back programs and price stabilisation, cf. Section 15-1, second paragraph of the STA. Given the duties carried out by Oslo Børs in connection iwith the market surveillance, it is assumed that Oslo Børs will perform specific practical functions in respect of the supervision of share buy-back programs and price stabilisation. The FSA has reviewed these guidelines. 

Matters dealt with in the guidelines on buy-backs of own shares and price stabilisation

These guidelines explain the principal requirements set out in the Commission Regulation in respect of both buy-backs and price stabilisation. In addition, these guidelines also describes the application of other stock exchange and securities legislation and regulations in respect of buy-backs of own shares and price stabilisation.

These guidelines deal with listed shares, including shares admitted to listing on Oslo Axess, cf. section 3.1 below on the use of derivative contracts for buy-backs. The rules that apply to buy-backs and price stabilisation for securities other than shares may differ from those described herein. The Commission Regulation does not differ between home state- and host state issuers. 

Buy-back programs for a company's own shares

Main features of the Commission Regulation

Articles 3 to 6 of the Commission Regulation sets out rules for buy-backs by listed companies of their own shares. In order to benefit from the ”safe harbour” exemption, the purpose of the buy-back must be to reduce the issuer's capital (in value or number of shares), or alternatively to meet obligations arising from debt financial instruments that are exchangeable into equity instruments, or to meet obligations in respect of employee share option programs or other allocations of shares to employees of the issuer or of an associate company, cf. Article 3.

Article 4, No. 1 imposes restrictions on matters including the size of the issuer's holding of its own shares and free equity, cf. Art. 19 in Directive 77/91/EC (Second Company Directive). As for Norwegian companies, Oslo Børs has the view that these restrictions will be satisfied if the company complies with the rules on buy-backs of own shares in Chapter 9 of the Norwegian Public Limited Liability Companies Act. With regard to foreign companies, compliance with Chapter 9 of the Norwegian Public Limited Liability Companies Act will not necessarily determine whether the requirements of the Commission Regulation are satisfied. Such companies will have to satisfy EU rules on holdings of own shares and equity, but these are to a very large extent equivalent to the Norwegian rules.

The issuer must disclose full details of the buy-back program to the public before making any purchases, cf. Article 4, No. 2. These details must include the objective of the program, the maximum consideration, the maximum number of shares to be acquired and the duration of the program. Any subsequent changes to the program must be subject to public disclosure without delay. It should be assumed that public disclosure must take the form of a separate announcement on the buy-back program. Alternatively, the minutes of the general meeting may be published if these minutes include the information mentioned in Article 4, No. 2. Oslo Børs takes the view that the announcement must be published in accordance with the provisions of Section 5-12 of the STA.

Article 4, No. 4 stipulates that the issuer must publicly disclose details of all transactions no later than the end of the seventh daily market session following the date of execution of such transactions. In practice, this requirement will be satisfied by adhering to the notification requirements for issuers set out in Section 4-2 and Section 4-4 of the STA which require that such transactions must be notified no later than prior to the start of stock exchange trading on the next trading day after the day the transaction is carried out.

In order to take advantage of the ”safe harbour” exemptions, the issuer must have in place mechanisms to ensure that it fulfils trade reporting obligations in accordance with stock exchange and securities legislation, cf. Article 4, No. 3. The responsibility for recording and reporting transactions in listed shares rests with the investment firm involved, cf. Section 10-18 of the STA. In accordance with the transitional rules for these provisions, Norwegian investment firms must report trades in listed financial instruments to the relevant regulated market, cf. Regulation No. 74 of 29 June 2007, Section 5. The member firm is required to identify buy-back trades in the Oslo Børs trading systems, cf. comments below.

Article 5 of the Commission Regulation sets out conditions for the price and volume of buy-backs of own shares. The issuer must not buy back shares at a price higher than the higher of the price of the last independent trade and the highest current independent bid at the regulated marked where the transaction is carried out. These conditions mean that the issuer cannot establish a new price level that is higher than the previously established level.

The issuer must not purchase in any one day more than 25% of the average daily volume of the shares on the stock exchange. The 25% limit shall be based on average daily turnover in the calendar month preceding the month in which the buy-back program is announced. This limit shall then apply for as long as the program continues, regardless of the volume of shares traded on the days when shares are bought back in accordance with the program so announced. If the announcement of the buy-back program does not include information on the calculation of the limitation on the number of shares that can be acquired, the limitation shall be calculated on the basis of average daily turnover over the 20 trading days prior to the purchase in question. The same limit of 25% of the average daily trading volume in the period in question shall apply to such purchases.

In cases of extremely low liquidity, the issuer may exceed the 25% limit. The conditions for this to be done are that the issuer must notify Oslo Børs in advance, the issuer must publish a stock exchange announcement to advise the market that it may exceed the 25% limit, and the issuer’s purchases must not exceed 50% of daily turnover. Oslo Børs is of the view that the calculation of the 50% limit should apply the same principles as the calculation of the 25% limit as described above. Moreover, Oslo Børs is of the view that companies listed on the OB Standard list will normally qualify for “extremely low liquidity”.

Questions arise over how the provisions on price and volume in Article 5 of the Commission Regulation shall be interpreted when the issuer uses derivatives to buy back its own shares. One way in which an issuer can use derivatives to buy back its own shares is to issue/sell put options. This gives a third party the right, subject to specific terms, to sell shares in the issuer to the issuer in return for a payment/premium. In the case of such options, Oslo Børs takes the view that the appropriate time to evaluate questions of price and volume is the time at which the option agreement is entered into. This means that the exercise price in such an option contract must not be higher than the market price when the option is exercised and delivery of shares takes place, otherwise it will be in breach of Article 5, No. 1 third paragraph. Similarly, the volume restrictions set out in Article 5 No. 2 and No. 3 must be taken into account at the time the option agreement is entered into, which in general implies that the issuer must not issue put options on any one day that exceed 25% of the average daily trading volume in its shares. Oslo Børs takes the view that agreements on forward purchases of shares should be treated as ordinary purchases, save that interest at the market rate can be deducted when calculating the price for the purposes of Article 5, No. 1. In the case of other types of derivatives contract, the question of price and volume in respect of Article 5 must be considered on a case‑by‑case basis. Oslo Børs assumes that shares and derivatives must be aggregated in respect of the Commission Regulation's provisions on price and volume.

The issuer shall not, during its participation in a buy-back program, sell its own shares or trade in its own shares at any time when the issuer has decided to delay the public disclosure of inside information in accordance with Section 5-3 of the STA and Section 3.1.2 of Continuing obligations of stock exchange listed companies, cf. Commission Regulation Article 6. Subject to detailed provisions, the issuer may be exempted from this requirement if the buy-back program is “time-scheduled”, e.g. where the number of shares and the dates on which they will be purchased during the period of the buy-back program are predetermined at the time the program is announced, and the buy-back program is managed by an investment firm or credit institution which is responsible for taking investment decisions in respect of the timing of the purchases of the issuer’s shares independently of, and without interference by, the issuer in question. Article 6 of the Commission Regulation also provides certain other exemptions where the issuer is an investment firm or credit institution.

Other rules and regulations relating to issuers trading in their own shares

Various other rules and regulations may be relevant to an issuer's buy-backs of its own shares. The rules and regulations described below apply both within and outside the “safe harbour” exemptions, and in part address matters other than those contained in the Commission Regulation. Firstly, purchases and sales by an issuer of its own shares are subject to the general rules of conduct set out in Chapter 3 of the STA, including the duty to investigate and the prohibition of unreasonable business methods.

Purchases and sales of own shares, including rights to such shares, are subject to the notification requirement set out in Section 4-2 of the STA and the duty to disclose large holdings set out in Section 4-3 of the same Act. In respect of calculating ownership percentages for the purpose of disclosing large holdings, the calculation shall be based on the registered share capital for the purposes both of share buy-backs and share issues, cf. NOU 1996:2 page 93 and NOU 2006:3 page 209.

Pursuant to Section 6-17, No. 4 of the STA, a company may be subject to restrictions on trading in its own shares if it is the subject of a mandatory offer. As in the case of disclosure of large holdings, a company’s holdings of its own shares do not affect the calculation of the 1/3 threshold for a mandatory offer as the calculation is based on the registered number of shares issued.

Purchases and sales of own shares, as well as the circumstances related to such transactions, may be relevant in respect of the issuer’s duty of disclosure pursuant to Chapter 5 of the STA and Oslo Børs’ Continuing obligations for stock exchange listed companies. The requirements for good business practice in accordance with Section 14 of the Stock Exchange Regulation and Section 2.2 of Continuing obligations may also be relevant to purchases and sales of own shares.

Section 15-4 of the STA and the Continuing obligations impose a general requirement for an issuer to treat the holders of all financial instruments it has issued on an equal basis. Any deviation from the principle of equal treatment must have a factual basis. The requirement for equal treatment is also relevant to an issuer’s purchases and sales of its own shares. Oslo Børs takes the view that the requirement for an issuer to treat its shareholders equally, taken together with the requirement for transparency in the market, will in general best be addressed by making purchases and sales of own shares through the stock exchange or by making a public offer to all shareholders. However, an issuer should take particular care even when making purchases and sales through the stock exchange if its shares suffer from weak liquidity.

Trades by an issuer in its own shares, which are listed on Oslo Børs, are in the same way as other trades subject to rules on reporting to Oslo Børs pursuant to the STA and the Member and Trading Rules ("MTR") as in force from time to time.

Oslo Børs also draws attention to the Norwegian Code of Practice for Corporate Governance Section 3, which states that mandates granted to the board of directors for the acquisition of a company’s own shares should be limited to specified purposes and should not be valid for any period that extends beyond the next annual general meeting.

Price stabilisation

General

Price stabilisation may, in the same way as buy-backs of own shares, be encompassed by the prohibition of market manipulation. Articles 7-10 of the Commission Regulation set out the requirements for price stabilisation to qualify for the safe harbour exemptions. The Commission Regulation is largely based on the CESR Standard on price stabilisation and allotment dated 9 April 2002.

Price stabilisation is typically carried out by the manager of a major issue of shares making purchases of shares, in accordance with the specific provisions, in a period following the implementation of the offer if the price of the shares falls during this period. The purpose of price stabilisation is to prevent a fall in the share price caused by the selling pressure that may be generated by short-term investors immediately after a share issue. Such price stabilisation is normally in the interest of the issuer and the investors who have bought shares, and therefore helps to ensure a well-ordered market and to contribute to greater confidence of issuers and investors in the financial markets, cf. Paragraph 11 of the introduction to the Commission Regulation.

Normally, price stabilisation is carried out by the manager, in accordance with an agreement with the issuer, accepting subscriptions or acceptances for more shares than are included in the original offer (an “over allotment facility”). In order to ensure the allotment of the right number of shares, a shareholder will typically lend shares equivalent in number to the over allotment to the manager. The issuer grants the manager the right to purchase the same number of shares at the offer/ allotment price (termed an “over allotment option” or “greenshoe option”). The manager can then discharge its liability in respect of borrowed shares either by buying back shares in the market during the stabilisation period at prices lower or equivalent to the offer price or by exercising the option. The Commission Regulation describes the use of an over allotment option or an over allotment facility as “ancillary stabilisation”.

Price stabilisation may be carried out in negotiable securities which are listed on a regulated market (typically a stock exchange) or for which admission to listing has been requested, cf. Article 2, No. 6 and No. 7 of the Commission Regulation. Stabilisation may also be carried out by using derivative instruments linked to the underlying instrument, cf. paragraph 12 of the introduction to the Commission Regulation. These guidelines deal only with shares as Oslo Børs considers this as the most relevant area. Price stabilisation may be carried out in connection both with initial public offerings (primary and secondary listings) and with subsequent secondary offers (share offers and sales of existing shares), subject to the condition which the offer in question qualifies as a significant distribution of shares. For this purpose, a significant distribution means an initial or secondary offer that is publicly advertised and that differs from normal trading in terms of both the amount of the offer and the sales methods used, cf. Article 2, No. 9.

It is customary that information on the party, which will receive any gains made from the stabilisation trades, is made public. Oslo Børs sees clear advantages with this practice.

Main requirements of the Commission Regulation

The Commission Regulation stipulates that stabilisation may only be carried out by investment firms and credit institutions, cf. Article 2 No. 7. Stabilisation shall be carried out only for a limited time period and in any case no longer than 30 days. The timing for the start of the period may however vary depending on the nature of the offer and the securities in question. In this respect, Article 8 of the Commission Regulation provides provisions that are more detailed. Securities other than shares may be subject to longer periods.

The stabilisation period for an initial public offering is assumed to start on the first day the shares are traded and to last for 30 calendar days, cf. Article 8, No. 2 first paragraph. In the case of a subsequent offer (both offers to subscribe for new shares and offers of existing shares) the stabilisation period starts on the date the offer price is publicly disclosed and last for 30 calendar days, subject to the requirement that the period must in any case end no later than 30 calendar days following the date of allotment, cf. Article 8, No. 3. Stabilisation must not be executed above the offering price, cf. Article 10.

Prior to the start of the offer period, information must be publicly disclosed to the effect that stabilisation may be undertaken, that stabilisation transactions are intended to support the market price, the beginning and end of the stabilisation period, the identity of the investment firm/credit institution that will carry out the trades and information on any over allotment facility or over allotment option, including the terms and conditions thereof. Public disclosure of the information on stabilisation shall be carried out in accordance with Section 5‑12 of the STA, cf. the consultation document issued by the FSA on 3 March 2004, section 10.4.

Where the issue/offer requires a prospectus, the information on stabilisation must be included in the prospectus, and there is no requirement for separate public disclosure of the matters mentioned above, cf. Commission Regulation Article 9 (1) second paragraph. The requirement to disclose such information is included in Sections 5.2.5 and 6.5 of Annex III to the Prospectus Regulation (No. 809/2004/EC).

The party that carries out stabilisation must report stabilisation transactions to the competent authority of the relevant market within seven trading days, cf. Article 9, No 2. Norwegian law and stock exchange requirements go beyond the Regulation on this subject. Stabilisation transactions made by members must be reported to Oslo Børs in accordance with the ordinary reporting requirements set out in the Oslo Børs Member and Trading Rules (MTR). All the orders and transactions in question must be recorded in a separate file/database to make it possible at any time to identify the trades and orders which have been carried out or are in process. In addition, Oslo Børs requires that the party undertaking stabilisation or a person authorised by such party shall report stabilisation transactions to Oslo Børs every late afternoon/early evening, and in any case no later than 08:15 on the day after any such purchase or sale has taken place. The report must include information on the time, price and volume of every order and trade that is part of price stabilisation and must also identify the counterparty broker. In the event that no stabilisation transactions take place on a trading day during the stabilisation period, notice to this effect must also be given to Oslo Børs on the same timetable as for reporting stabilisation transactions.

No later than one week following the end of the stabilisation period, information must be publicly disclosed on whether or not stabilisation was undertaken, the date of which stabilisation started, the date of which stabilisation last occurred and the price range within which stabilisation was carried out, for each of the dates on which stabilisation transactions were carried out.

Where several investment firms or credit institutions undertake the stabilisation, one of those shall act as central point of enquiry for any request from Oslo Børs or the FSA.

Ancillary stabilisation

The Commission Regulation also provides safe harbour exemptions for ancillary stabilisation, cf. Article 11. The English text of the Commission Regulation defines the over allotment option as an “option granted by the offeror”. This raises the question of whether an over allotment option may only be issued by the offeror, or whether other parties also may issue such an option. In the case of both primary and secondary offers, parties other than the offeror, such as a major shareholder, may lend shares to the party undertaking stabilisation. Oslo Børs interprets the Commission Regulation to mean that an over allotment (“green shoe”) option may only be issued by the offeror (cf. “option granted by the offeror”). However, it is not necessarily the case that any deviation from these rules represents unlawful market abuse. Oslo Børs is of the view that an over allotment option may be granted by a party other than the offeror without this necessarily representing a breach of the STA.

In order to benefit from the safe harbour exemptions, ancillary stabilisation must be undertaken in accordance with the requirements on public disclosure and reporting set out in Article 9. Over allotment may only take place during the subscription period and at the offer price, cf. Article 11(a) of the Commission Regulation. The wording of this provision causes some uncertainty as to whether ancillary stabilisation may also be carried out in connection with a secondary offer of existing securities since such an offer does not involve subscription. However, the definition of ancillary stabilisation refers to stabilisation carried out in respect of the acceptance of subscriptions or offers to purchase, which suggests that secondary issues should also be included. Furthermore, the definition states that ancillary stabilisation may be carried out in the context of a “significant distribution” of securities, and the term ‘significant distribution’ is defined as an initial or secondary offer of securities. Oslo Børs takes the view that the Commission Regulation does not seek to limit ancillary stabilisation to apply only to initial public offers.

A position resulting from the exercise of an over allotment facility that is not covered by the over allotment option must not exceed 5% of the original offer, cf. Article 11 b). Oslo Børs interprets this requirement to mean that the party undertaking stabilisation may over-allocate a maximum of 5% of the original offer in excess of the over allotment option issued by the offeror. Other limitations may apply in this respect as a result of the rules of the STA on uncovered short selling. The over allotment option must not exceed 15% of the original offer, cf. Article 11 d).

The holder of the over allotment option may only exercise the option where the securities in question have been over-allotted. The exercise period of the over allotment option must be the same as the stabilisation period. The exercise of the over allotment option must be disclosed to the public promptly, together with all appropriate details, including in particular the date of exercise and the number and nature of relevant securities involved. See also Article 11 c), e) and f).

Other matters in respect of price stabilisation

In the case of price stabilisation, as in the case of issuers buying back their own shares, it is important to pay proper attention to the rules on insider trading, conflicts of interest, good business practice etc., both in terms of the Commission Regulation and in general.

Oslo Børs will monitor stabilisation to ensure that it takes place in accordance with the Commission Regulation and other rules/guidelines. Oslo Børs will need to have contact details for one or more officers of the party undertaking the stabilisation who are in a position to respond to questions at short notice. The individual(s) nominated as contact person(s) must have appropriate knowledge of the stabilisation process and be available to respond to enquiries.

Member firms are strongly recommended to notify Oslo Børs in advance when a price stabilisation exercise is to be carried out in order to ensure efficient and well-organised implementation and reporting of stabilisation trades. 

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