Dozens of companies have taken advantage of temporary trading rules, introduced after the terrorist attacks on the US, to buy back their own shares.
Using its emergency powers for the first time, the Securities and Exchange Commission (SEC) waived restrictions on companies repurchasing their own shares in a bid to protect stock prices from panic selling. Though the relaxation of the rules was originally planned for only five days, the SEC decided to extend the waiver for a further five working days.
Harvey Pitt, chairman of the Washington, DC-based regulator, said the measures were drawn up to "facilitate an orderly market", following the attacks, which closed the markets for four days.
Under normal circumstances, companies can only buy a limited amount of their own stock each day to prevent them from leading the market. Securities rules also restrict the times at which such repurchases can be made, preventing buybacks near the start and close of the trading day.
Those rules were partially relaxed when the markets re-opened for the first time after terrorist assaults, although the SEC added that shareholders would be protected and companies would not be allowed to unfairly prop up their stock price. Securities lawyers say shareholders had nothing to fear. "It was an action that made a lot of sense and couldn't open anyone up to criticism," says Mark Bergman, head of Paul, Weiss, Rifkind, Wharton & Garrison's securities practice. Contrary to some expectations, the Commission did not impose limits on short selling, a practice whereby an investor, betting that prices will go down, borrows a security from a broker and sells it on the understanding that he will later have to buy it back.
Calls to lawyers
Companies that took advantage of the waiver included Cisco Systems which said it would repurchase $3 billion of its own stock over the next two years, and First Data Corporation which announced it would buy up to $700 million of its common stock. Others included food and drink company PepsiCo, which said it would use the emergency trading rules to resume its share repurchase programme, buying up to $2 billion of its stock.
The rush by companies to buyback their shares caused a flood of calls to New York's securities lawyers. "We had a number of calls when press reports started appearing on the weekend," says Bergman, who spent the weekend quickly drawing up a memo for clients. "I was in the office at 7.30 on Monday morning fielding calls until about 1.30."
James Scoville, a partner of Debevoise & Plimpton, also found himself fielding many calls from clients. "We did receive many queries," he says. "A lot of our clients had existing repurchase [plans] anyway. But there were cases where this prompted people to adopt new plans."
Like many lawyers, Scoville credits the SEC with taking swift action. "They really had a chance to provide meaningful action, and they took it," he says.