In this insight, Michael Seigne looks at some critical concerns around how these programmes are executed, stressing the need for boards to take a more considered approach to safeguarding shareholder interests.
Current Concerns in Buyback Execution
Most companies execute their share buybacks through structured execution products contracted with investment banks.
While these arrangements appear convenient, they introduce risks that boards and their legal advisers may not fully appreciate. In particular, these arrangements present several hidden conflicts of interest.
Some of these contracts involve investment banks guaranteeing certain outcomes for the company. Conflicts can arise from embedded fee incentives linked to the buyback's execution performance, which may be at odds with the interests of the remaining shareholders.
This misalignment poses a significant risk to boards, leaving them vulnerable to shareholder dissatisfaction.
Transparency and Scrutiny
Companies are legally required to disclose detailed information about their buyback execution, including daily trading activity.
This transparency gives shareholders - many of whom are trading experts themselves - the opportunity to analyse buybacks execution strategies.
Using this data, it is possible to reconstruct the exact trading strategies employed, ultimately enabling shareholders to verify if the execution aligned with the company's stated objectives and their interests.
Safe Harbours
Companies frequently seek to execute their buybacks within regulatory safe harbour rules. Operating within these rules should protect the companies from any such legal challenges.
However, there is an additional layer of complexity. Questions are also being raised about whether the benefit of these safe harbours can be enjoyed by companies which have entered into performance guaranteed execution contracts.
Mitigating Class Action Risks
The above-mentioned misalignment of interests leaves boards exposed to potential legal liabilities, with the possibility for shareholders to seek recourse if the buyback has harmed their interests.
Boards can act swiftly to protect themselves by gaining expertise to address the topic promptly. This enables them to better safeguard shareholder interests, and potentially mitigate risks associated with any class actions.
The Need for Urgent, Proactive Measures
UK and European listed firms are allocating more capital to be returned to shareholders via buybacks.
It is sensible for boards to recognise that returning capital via buybacks involves significantly more risks than dividends. This risk in buyback implementation results in a greater opportunity for value leakage.
Major shareholders are now more aware of the scale of these problems. High profile media articles - including the Sunday Times and FT - have been stating that issuers have paid up to 8.5% in fees just to buy shares, a high cost relative to what shareholders may pay to buy these very same shares.
Boards are ultimately responsible for protecting the interests of shareholders through buybacks implementation.
There exists a distinct need for a stronger understanding of any buyback execution process so that boards can ask better questions around the topic. Hopefully, greater awareness of these conflicts will enable boards to require more scrutiny of buyback execution.
About Candor Partners
Candor Partners' mission is to bring fairness through knowledge and transparency to corporates and their boards when they prepare for and execute their listed market transactions. They help boards and companies to align their buyback objectives with an appropriate implementation process.
To learn more about the issues they highlight with share buyback execution, read a further article on the Boards' Dilemma here.