March 30, 2022

Buybacks: Considerations for Volatile Times

If you’re thinking about initiating a stock repurchase during the current period of global turmoil and market volatility, be sure to check out this Skadden memo.  It provides a comprehensive overview of the strategic & legal considerations, alternative transaction structures, and the pros and cons of repurchasing stock.  This excerpt addresses the implications of a decision to engage in a buyback on earnings guidance:

How should a company consider earnings guidance preceding the company’s implementation of a share repurchase program?

As in the ordinary course of business, a company contemplating a share repurchase should examine its past earnings guidance to ensure that subsequent developments have not rendered such guidance materially misleading. Companies should pay close attention to earnings guidance given in the midst of a turbulent market and uncertain economic conditions because such guidance is more likely to be revealed, in hindsight, to have been based on faulty assumptions. Overly pessimistic guidance runs the risk of inducing investors to participate in a share repurchase where they otherwise would have abstained, particularly where more accurate projections would have pointed to stronger future earnings.

To minimize the risk of potential liability under Rule 10b-5 in the current market environment, a company contemplating a share repurchase should be wary of allowing too much time to elapse between releasing its earnings guidance and implementing a share repurchase program. Initiating a contemplated share repurchase close to the time earnings guidance is released reduces the likelihood of subsequent developments retroactively rendering such guidance materially misleading. If developments arise that cause a company’s prior earnings guidance to be misleading, the company should consult counsel and update such guidance before proceeding with its share repurchase.

John Jenkins