Capital Markets Update: MFSA circular on share buy-backs – pre-launch meetings

The Malta Financial Services Authority (MFSA) has published a circular on share buy-backs carried out by Maltese issuers. The circular does not enter into the substance of share buy-backs, but does make two notable points, the first on compliance and the second on MFSA meetings.

1. Compliance

The MFSA has, once again, acknowledged that it is “difficult to fully comply” with the strict criteria which the law – primarily article 5 of the EU Market Abuse Regulation (MAR), and Commission Delegated Regulation (EU) 2016/1052 (Delegated Regulation) – imposes on issuers who wish to carry out their buy-backs under the ‘safe harbour’ regime afforded under article 5 of MAR.¹

Given the acknowledged illiquidity of the Maltese market, the primary obstacle is the daily volume restriction, which limits purchases to no more than 25% of the average daily trading volume. While this may be manageable for larger issuers with somewhat higher liquidity in their shares, it poses significant limitations for smaller issuers with much lower trading volumes, where the threshold may be reached with minimal repurchase amounts. As a result, many issuers would be unable to meet the safe harbour requirements and thus forfeit its protections.

While the MFSA acknowledges the issue, it has nonetheless reiterated its position that “issuers should nonetheless seek to comply with the requirements of the safe harbour to the extent possible”. However, the Circular does not provide any guidance on what should be considered possible or not in practice, nor does it provide any clarity on whether issuers who satisfy all other safe harbour conditions – but exceed the volume limit solely due to low trading activity – would still be afforded a certain level of protection by the MFSA, even though it is recognised that the automatic safe harbour protection would not apply. Until MAR is amended to better reflect local market realities, a more decisive and transparent approach from the regulator would be welcome, as it would eliminate much of the perceived regulatory risk that currently dominates any boardroom discussion on share buy-back programmes.

2. MFSA meetings

The MFSA has “strongly encouraged” issuers intending to carry out a buy-back to “take a pro-active approach and contact the Authority [before carrying out the buy-back] to discuss, inter alia, the aims of the programme and the intended conditions”. The MFSA intends to use these meetings “to guide the [sic.] issuers regarding the structure of the proposed buy-back programme raising any reservations which it may have regarding, inter alia, the aims and conditions with the aim of protecting market integrity”.

Despite the MFSA acknowledging that “it is not in a position to approve or otherwise buy-back programmes”, the approach taken in this context raises concerns that such meetings and interaction could turn into a de facto approval process and which could act as a disincentive to issuers. After all, if the MFSA intends to provide guidance in such meetings as to what should or should not be done including “raising any reservations which it may have”, no issuer is likely to proceed with a programme if it conflicts with the views expressed by the MFSA during such interactions.

It is, of course, in the market’s interest for the MFSA to issue guidance and express its views on this and other subjects, but this could perhaps be better achieved in the form of public guidance on the specific issues that the MFSA or the market has identified where “uncertainties … may arise”, including in relation to the inability to comply with the daily trading volume limits under the MAR safe harbour regime.

Of particular interest is the MFSA’s assertion that it will use these meetings to raise any reservations which it may have, including on the “aims and conditions” of the buy-back. In this regard, it is pertinent to point out that issuers are permitted to carry out share buy-backs outside the MAR safe harbour regime, especially if the intended purpose of the buy-back does not match the limited purposes set out in MAR.² Naturally, buy-backs conducted outside the MAR safe harbour regime will not enjoy the exemptions enjoyed by those carried out under the safe harbour but this does not mean that this should automatically raise market integrity concerns. Moreover, buy-backs carried out of distributable profits in terms of article 106 of the Maltese Companies Act can be carried out for any purpose.

Conclusion

Buy-back programmes are common in the international capital markets, providing several benefits to issuers and investors alike, so it is encouraging to see several local issuers launching their own programmes. While the MFSA’s greater focus on buy-back programmes is definitely well-intentioned, we believe that greater clarity and a more pragmatic approach are needed to support issuers, particularly smaller ones, in order to encourage (rather than potentially discourage) buy-back programmes . To this end, we believe it would be beneficial for the market to receive further clarity on the status of the safe harbour when the daily trading volume limit cannot be respected and that the market as a whole would also benefit from a better understanding of the MFSA’s particular concerns regarding the aims and conditions of buy-back programmes and the specific market abuse risks they may create.

¹ In view of the fact that share buy-backs can be legitimate for economic reasons, MAR creates a framework (referred to as a ‘safe-harbour’) under which, certain share buy-backs are exempt from the prohibitions against market abuse provided that the buy-backs are carried out in compliance with the requirements under article 5 of MAR, and the Delegated Regulation.

² In terms of article 5(2) of MAR, in order to benefit from the safe harbour exemption, a buy-back programme shall have as its sole purpose: (a) to reduce the capital of an issuer; (b) to meet obligations arising from debt financial instruments that are exchangeable into equity instruments; or (c) to meet obligations arising from share option programmes, or other allocations of shares, to employees or to members of the administrative, management or supervisory bodies of the issuer or of an associate company.