What is a stock buyback and their associated legal dilemmas?

By Shaista Sayed

A stock buyback is almost exactly what it sounds like- it is when a corporation buys back a portion of their shares in the stock market. Doing so can increase shareholder value and artificially boost a corporation’s stock price. In addition, stock buybacks boost Earnings Per Share (EPS), making corporations appear more profitable on paper- despite their current situations. Furthermore, stock buybacks can hurt workers and lead to potential layoffs if corporations spend what is considered out of their budget on stock buybacks.

Critics claim that stock buybacks can sacrifice long-term gains for short-term profit. According to crystalfunds.com, when corporations use their funds and, in many cases, their debts, to proceed with stock buybacks, they are likely not utilizing their balance sheet for more productive ventures like investing in capital and research that can pay off in the long term (Crystal Capital Partners 2022). Additionally, ethical concerns can be raised as workers’ benefits are put at stake. According to the Communication Workers of America, this was seen as an example in 2015 with Verizon after a $5 billion stock buyback. In the following year, Verizon reported to the CWA that they “couldn’t afford to provide pay increases, improved health care, or better job security” to Verizon employees. Furthermore, if Verizon invested the billions used in the stock buyback on workers, each employee could have received $28,000 (CWA 2020). This shows that stock buybacks may not be a financially intelligent move and can instead be a sign of corporate greed and desperation. A similar situation was seen in the years 2015 through 2017 with McDonalds. According to rooseveltinstitute.org, McDonalds could have boosted its workers’ pay by $4,000 each (Roosevelt Institute 2019).

Stock buybacks not only raise ethical and financial dilemmas, they also are of great legal debate. In fact, stock buybacks were considered illegal before Rule 10b-18 was passed in 1982. According to the American Bar Association, Rule 10b-18 protects corporations from unprovoked investigation by the Securities Exchange Commission (SEC) and lawsuits even if a corporation did not have ill intentions (Kaswell 2021). However, Rule 10b-18 still leaves behind legal grey areas that executives and insiders can exploit. According to the Harvard Law School Forum on Corporate Governance, while Rule 10b-18 prohibits executives from selling stock the same day a stock buyback is announced, but not a few days after. This can allow executives to make significant profit while stock prices rise in the short-term (Williamson, Babcock, He, 2020). Although stock buybacks are technically considered public information, executives have an advantage over shareholders in the sense that they can know the real context and motive behind the buyback and know when to expect a buyback announcement.

In conclusion, while stock buybacks may seem like a strategic way to attract investors and make a corporation appear more outwardly profitable, they can hurt both a corporations’ profits and its workers, especially in the long term. Consequently, stock buybacks can be considered stock market manipulation and advantageous to insiders, leaving room for heavy legal debate. Many believe that stock buybacks contribute to income inequality and worsen the wealth gap, helping the rich get richer and the poor, poorer.

Works Cited

Crystal Capital Partners. What are Stock Buybacks? https://www.crystalfunds.com/insights/what-are-stock-buybacks

Communication Workers of America. Stock Buybacks Hurt Workers. https://cwa-union.org/stock-buybacks-hurt-workers#:~:text=Stock%20buybacks%20are%20when%20companies,investing%20in%20workers%20or%20equipment.

Roosevelt Institute. Stock Buybacks Are a Key Example of Extractive Corporate Power. https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI_Stock-Buybacks-key-example-of-extractive-corporate-power-Fact-Sheet-201910.pdf

Stuart J Kaswell. Should Congress or the SEC ‘Do Something’ About Stock Buybacks? https://www.americanbar.org/groups/business_law/resources/business-law-today/2021-april/should-congress-or-the-sec-do-something/

Sarah Keohane Williamson, Ariel Fromer Babcock, and Allen He,. The Dangers of Buybacks: Mitigating the Common Pitfalls. https://corpgov.law.harvard.edu/2020/10/23/the-dangers-of-buybacks-mitigating-common-pitfalls/