12.31.2003

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Updates

The SEC recently amended the stock repurchase safe harbor rule under Rule 10b-18 of the Securities Exchange Act of 1934, which provides an issuer with a safe harbor from liability for repurchases of its common stock if the issuer complies with the rule’s manner, timing, price and volume conditions. The amendments to Rule 10b-18 simplify and update the safe harbor provisions to reflect market changes that have developed since Rule 10b-18’s adoption in 1982, and require more rapid and regular disclosure of issuer repurchases.

Amendments to Rule 10b-18’s "Safe Harbor"

Amended Rule 10b-18 continues to provide an issuer with a "safe harbor" from liability for manipulation of its stock price (under Section 9(a)(2), Section 10(b) and Rule 10b-5 of the Exchange Act) when repurchasing its shares in the open market. To qualify for the safe harbor for any given day, an issuer must satisfy each of the manner, timing, price and volume conditions of the rule. If an issuer fails to meet any one of the four conditions, the issuer’s purchases are disqualified from the safe harbor for that day. Amended Rule 10b-18 expands eligibility for the safe harbor and alters the timing, price and volume conditions mainly to allow issuers whose securities are less susceptible to manipulation to stay in the market longer and to repurchase a greater number of shares during periods of severe market decline.

Definition of Eligible Securities Expanded

The amendment expands the definition of a "Rule 10b-18 purchase" to include any bid or limit order that would effect such a purchase, continues to apply to purchases by or for an issuer or any affiliated purchaser of the issuer, and codifies the position that the safe harbor is available for repurchases of all common equity securities including units of beneficial interests in a trust or limited partnership or depository shares. The amended rule continues to be unavailable for repurchases involving securities that are not common equity securities, such as preferred stock, warrants, rights, convertible debt securities, options or security futures products, and repurchases effected in markets outside of the United States.

No Significant Changes to Manner Condition

Other than the exception for after-hours repurchases discussed below, the SEC has not adopted any substantive changes to the "manner" condition, and issuers are still required to use a single broker or dealer on a given day to bid for or purchase their common stock.

Timing Condition Loosened for Some Issuers

Prior to these amendments, all issuers were prohibited from making stock repurchases during the last half-hour of trading. Under amended Rule 10b-18, limitations on purchases at the close of trading vary depending on the security’s average daily trading volume and public float value. Securities with an average daily trading volume of $1 million or more for the previous four weeks and a public float value (aggregate market value of common stock held by non-affiliates of the issuer) of $150 million or more qualify for trading up to 10 minutes before the scheduled close. All other issuers are still prohibited from making stock repurchases during the last 30 minutes of trading. Amended Rule 10b-18 continues to prohibit all issuers from making the opening transaction for any given day.

Safe Harbor Extended to Cover After-Hours Repurchases.

The amended rule also extends the safe harbor to issuer repurchases that are effected after hours at prices that do not exceed the lower of the closing price of the primary trading session in the principal market or any lower bids or sale prices subsequently reported in the consolidated system by other markets. Issuers are prohibited from making the opening transaction of the after-hours trading session, but may repurchase until the end of the period in which last sale prices are reported in the consolidated system. For purposes of these after-hours transactions, issuers may use a broker or dealer different from the broker or dealer used during normal trading hours.

Price Condition Made Uniform

Prior to these amendments, Rule 10b-18’s price limitations varied depending on the market for the security. The amended rule applies a uniform price condition regardless of where the securities are traded. Under amended Rule 10b-18, issuers may repurchase their securities at a price that does not exceed the highest independent bid or the last independent transaction price, whichever is higher, reported in the consolidated system.

Volume Limitations Amended to Include Block Repurchases

Prior to these amendments, Rule 10b-18 limited an issuer’s daily repurchases to a maximum of 25% of the average daily trading volume of its shares. Because block purchases were not subject to this volume limitation, and shares repurchased in block trades were not included in calculating the average daily trading volume, issuers could make unlimited block repurchases. Under amended Rule10b-18, issuers must include block repurchases in their calculation of the 25% average daily trading volume limitation, and can include these block repurchases in calculating the average daily trading volume for the security, which increases the amount of stock that some issuers may repurchase within the safe harbor. Amended Rule 10b-18 also allows issuers to repurchase one block per week, in lieu of complying with the 25% average daily trading volume limitation, provided that the issuer does not make any other Rule 10b-18 purchases on that day. However, the issuer may not use the volume increase from such a block repurchase to increase its 25% average daily trading volume limitation.

Expanded Safe Harbor Applies After Market Suspension

The adopted amendments modify the safe harbor applicable to trading sessions following a market-wide trading suspension to increase the volume limitation to 100% of the stock’s average daily trading volume. Under amended Rule 10b-18, the safe harbor still covers issuer repurchases made at the reopening and during the last half-hour prior to the scheduled close of trading or at the next day’s opening if a market-wide trading suspension was in effect at the scheduled close of trading.

Expanded Safe Harbor Merger Exclusion

Amended Rule 10b-18 modifies the safe harbor period for issuer repurchases during a merger, acquisition, or similar transaction involving a recapitalization, other than transactions in which the consideration is solely cash and there is no valuation period, to include the period from public announcement of the transaction until the earlier of its completion or target shareholder approval. In addition, the issuer’s single-day purchases must not exceed the lesser of 25% of the four-week average daily trading volume or the issuer’s average daily Rule 10b-18 purchases during the three full calendar months preceding the announcement of the transaction.

Issuers Must Disclose Repurchases in Periodic Reports

An issuer must disclose in its periodic reports all repurchases of equity securities, regardless of whether the transactions are within the Rule 10b-18 safe harbor. Issuers are required to disclose, among other things, the total number of shares repurchased, the average price paid per share, the number of shares repurchased as part of a publicly announced plan or program, and the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs. Both open market and private transactions must be disclosed in a new table required in Item 2(e) of Forms 10-Q and 10-QSB, Item 5(c) of Forms 10-K and 10-KSB, and in Form 20-F pursuant to new Item 703 of Regulations S-K and S-B. The table includes required disclosure of all issuer repurchases of equity securities during its last fiscal quarter. In addition, an issuer must disclose in footnotes to the table the principal terms of publicly announced repurchase plans or programs.

Effective Date

Amended Rule 10b-18 became effective on December 17, 2003. The new repurchase disclosure will be required in reports on Forms 10-Q, 10-QSB, 10-K and 10-KSB filed for periods ending on or after March 15, 2004 (and in reports on Form 20-F for fiscal years ending on or after December 15, 2004).

Text of the Amendments

This Update is only intended to be a summary of the amendments. You can find the full text of the final rules as adopted at http://www.sec.gov/rules/final/33-8335.htm.

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