February 11, 2003
Jonathan G. Katz, Secretary
Re: File No. S7-50-02
Dear Mr. Katz:
On behalf of Wal-Mart Stores, Inc., I am commenting on the Commission's proposed amendments to Rule 10b-18 under the Securities Exchange Act of 1934, as set forth in Release Nos. 33-8160; 34-46980; IC-25845; File No. S7-50-02.
We respectfully disagree with the proposed wording of the amendment to the exception set forth in Rule 10b-18(a)(3)(iv) to the definition of "Rule 10b-18 purchase." As currently in effect, this exception excludes from the Rule 10b-18 safe harbor all purchases of an issuer's common stock that are effected pursuant to a merger, acquisition, or similar transaction involving a recapitalization from the definition of "Rule 10b-18 purchase." As proposed to be amended, this exception would exclude from the safe harbor all purchases effected during the pendency of any such transaction (the "pendency period").
The wording of the proposed amendment is unnecessarily broad. Stock repurchases are often beneficial to shareholders by providing a return of excess capital to shareholders in a manner that is accretive. While it is important that there be reasonable safeguards to limit issuer manipulation of its stock price, those safeguards must be balanced against the legitimate benefits of issuer share repurchases.
We believe that the existing regulations more appropriately balance these competing concerns. While we understand the Commission's concerns expressed in the release that certain types of transactions give issuers greater incentive to manipulate their stock price, we believe that the concerns are already appropriately addressed in the current regulations. Rule 10b-18 as it currently stands requires issues to adhere to strict limitations on volume, timing, price and manner of sale. Further, Regulation M already bars repurchases of issuer stock during periods of a stock merger and during the period from mailing of proxy materials until a shareholder vote.
We request that the Commission reconsider its denial of the safe harbor in five circumstances that do not create the potential for the types of abuses that Section 9(a)(2) of the Exchange Act and Rule 10b-5 are intended to combat.
1. Purchases When Issuer Securities Are Not the Merger or Acquisition Consideration
First, we believe that the proposed amendment should clarify that the acquisition exclusion from the Rule 10b-18 safe harbor does not apply in the context of a merger, acquisition or similar transaction where the consideration does not include publicly traded securities of the issuer, securities convertible into those securities or options, warrants or other rights to acquire those securities (collectively, "Traded Securities") and the price of the issuer's common stock could not otherwise affect the amount of consideration to be paid by the issuer.
We understand the Commission's concern that an issuer might have incentive to support or raise the price of its stock in order to influence the pricing of the transaction, but believe that this concern is addressed adequately by Regulation M. Further, where an increase in the issuer's stock price resulting from a purchase of the issuer's common stock could not affect the valuation of the transaction, then the purchase of the issuer's stock while the transaction is pending could not be for the purpose of manipulating the issuer's stock price in connection with the transaction. Therefore, we believe a purchase of the issuer's stock under these circumstances should be eligible for the Rule 10b-18 safe harbor.
2. Purchases After Acquisition Consideration Has Been Fixed and Shareholders Have Voted
Second, in the case of a merger, acquisition or similar transaction in which either all or part of the consideration will be Traded Securities or the price of the issuer's common stock could otherwise affect the amount of consideration to be paid by the issuer, the proposed revised acquisition exclusion from the Rule 10b-18 safe harbor is too broad as currently worded. Again, where Traded Securities are part of the merger consideration, we understand the Commission's concern regarding an issuer's potential manipulation of its stock prior to finalization of the pricing and the occurrence of any required vote of the shareholders of the target company.
However, once the exchange ratio for the transaction is set and any required shareholder vote of the target company has occurred, there is no longer the potential for purchases of the issuer's common stock to have any effect on the valuation of, or to influence the target shareholders' vote on, the transaction. Therefore, the purchase of the issuer's stock could not affect the issuer's stock price in a way that impacts the transaction and could not give rise to the abuses Exchange Act Section 9(a)(2) and Rule 10b-5 are intended to address. For this reason, we believe that a purchase of the issuer's common stock under these circumstances should be eligible for the Rule 10b-18 safe harbor.
3. Early Announcement of a Potential Transaction
The Commission should reconsider what events commence the period relative to an acquisition during which the Rule 10b-18 safe harbor is not available. In the proposing release, the Commission stated that this period would start once the proposed acquisition is announced and continue through the completion of the acquisition. An unintended consequence of this definition of the pendency period is that issuers will be precluded from relying on the safe harbor in some instances in which the issuer has not even commenced discussions with a target. For example, in the City Code on Takeovers and Mergers issued by the Panel on Takeovers and Mergers which governs takeovers in the United Kingdom, there are circumstances under which an issuer must make a premature announcement of its potential interest in acquiring another company prior to having a firm intention to make an offer or even any discussions with the target.
Under the Commission's proposed definition of the pendency period, that announcement could deprive the issuer of the Rule 10b-18 safe harbor for repurchases of its stock until the issuer either announces that it will not proceed or it consummates the acquisition. We suggest that this period should not be deemed to commence until a letter of intent or acquisition agreement is executed or until a reasonable number of trading days prior to the announcement of an offer to acquire the target by tender or exchange offer.
4. Purchases During Immaterial Transactions
There may be certain merger or acquisition transactions that would have been within the safe harbor under the current language covering repurchases pursuant to a merger but that will be excluded under the proposed during the pendency language. For example, the owners of a small target company may request Traded Securities as consideration in instances where the small size of the transaction make it highly unlikely that share repurchases were effected pursuant to a merger, or to influence the price of Traded Securities in connection with the merger. In such a case, any savings of merger consideration might be greatly disproportionate to the cost of repurchasing the shares. For this reason, we believe that the Commission should clarify that transactions during the pendency of transactions that are immaterial to the issuer should be eligible for the Rule 10b-18 safe harbor.
5. Purchases Pursuant to a Rule 10b5-1 Plan
Finally, some issuers may effect share repurchases using Rule 10b5-1 plans and rely on the Rule 10b-18 safe harbor when making those purchases. Where a Rule 10b5-1 plan is adopted sufficiently in advance of the pendency period, the issuer should be able to continue to rely on the Rule 10b-18 safe harbor for its purchases under the Rule 10b5-1 plan. In these instances, the issuer would not be manipulating the market for the purpose of affecting the amount of consideration payable in connection with a merger or acquisition but rather would be following the requirements of its 10b5-1 plan to repurchase shares
Thank you for the opportunity to comment on the proposed changes to Rule 10b-18. Please do not hesitate to contact me at (479) 277-2345 if you wish to discuss these comments.