Market Manipulation, Shareholder Heterogeneity and Stock Repurchases

Corporations are significantly hindered in making repurchases by SEC Rule 10b-18, which considers all buybacks as involving potential market manipulation and artificially suppresses the prices that companies can pay for their shares in open market purchases. The main argument in this article is that, while passage of the Rule was an improvement on the prior regulatory regime which was characterized by massive uncertainty about the legality of literally every issuer repurchase program, the Rule is still far too restrictive on repurchases because it prohibits firms from repurchasing their shares at a premium over the bid or market price for the firm’s shares.

Despite the regulatory constraints on share repurchases, stock buybacks have surpassed dividend payments as the favored method for returning capital to shareholders, with a record $942.5 billion spent on repurchases in 2024. Stock buybacks are particularly important in tech companies like Apple, Microsoft, Alphabet (Google) and Meta Platforms (Facebook), which collectively repurchased over a trillion dollars of their own shares in the past three years. This Article defends buybacks against the accusation that they reflect market manipulation, argues that buybacks should not be regulated any differently than stock purchases by other fiduciaries, and, observing that the current regulations make it particularly difficult for all but the largest companies to make repurchases, recommends ending the restrictions on repurchases.

Heterogeneous beliefs about a corporation’s prospects results in a downward sloping demand curve for a corporation’s shares. The shareholding population are the investors most optimistic about the firm’s prospects. Many shareholders (i.e., those who are the most optimistic among the generally optimistic shareholding population) will prefer not to sell their shares absent a substantial premium. But since all shareholders are relatively optimistic about the company (or else they would not be shareholders) companies often cannot make repurchases without offering such a premium, which SEC Rule 10b-18 inhibits them from doing.

Because of shareholder heterogeneity, unlike dividends, share repurchases at a premium can make both selling and not selling shareholders better off. Relatively less optimistic shareholders (or shareholders who require liquidity for exogenous reasons) will prefer to sell their shares at a slight premium, while more optimistic shareholders will retain their shares and benefit because repurchases increase their ownership share of the firm and their percentage share of future profit distributions.