Back to Securities Law Committee publications

Gabriel Núñez
Uría Menéndez, Madrid
gabriel.nunez@uria.com

Susana Serrano de Frutos
Uría Menéndez, Madrid
susana.serrano@uria.com

The Comisión Nacional del Mercado de Valores (CNMV) issued recommendations on discretionary treasury stock transactions on 18 July 2013¹. These recommendations concerned trading of discretionary treasury stock, considering as such a purchase or sale of treasury stock on any organised trading platform which is ordered by the issuer, except where such a transaction adheres to:

• the stipulations under Regulation (EU) 596/2014 of 16 April on market abuse (MAR) on exceptions for buy-back programs and stabilisation of financial instruments; or
• the provisions of CNMV Circular 1/2017 of 26 April on liquidity contracts (which is to date, the sole practice in Spain which is considered by the CNMV an accepted market practice under the terms of Article 13 MAR). 

The CNMV recommendations were aimed at preventing misleading signals in the market that were potentially caused by discretionary treasury stock transactions, and therefore, acted as a ‘soft safe harbour’ alongside MAR-regulated ‘safe harbours’ from 2013 onwards.

The CNMV has recently reviewed the 2013 recommendations in light of MAR and its implementation within the Spanish legal framework. It concludes that no other European Union (EU) country has a specific regulation on discretionary treasury stock transaction. Therefore, said trading must be understood within the framework of the general MAR protection on trading with treasury stock beyond the scope of buy-back programs, stabilisation measures or accepted market practices, and without the need of a specific regulation. On 13 January 2020, the CNMV issued a public statement whereby it rendered the 2013 CNMV recommendations ineffective².

The Market Abuse Regulation was adopted to lay out a uniform and common framework regarding market abuse regulation, in order ‘to preserve market integrity, to avoid potential regulatory arbitrage... and to provide more legal certainty and less regulatory complexity for market participants’ in the EU. Differences between national regulations were understood as possible obstacles to trade and distorters of competition. Consequently, the CNMV recommendations were rendered ineffective in order to comply with the harmonising purpose of MAR.

Even though the CNMV recommendations have been rendered ineffective, treasury stock transactions of issuers with securities listed in a regulated market continue to be regulated and covered by the Spanish legal framework. Article 144 et seq. of Royal Legislative Decree 1/2010 of 2 July, approving the consolidated text of the Corporate Enterprises Act (TRLSC), sets out the different conditions under which issuers may dispose of their own shares, and the consequences of an infringement of said conditions. Article 509 of TRLSC sets forth the limit that treasury stock can represent out of the total share capital of issuers with securities admitted to trading in a regulated market. In addition, Articles 14 and 15 of MAR, respectively, prevent the execution of treasury stock transactions:

• in possession of inside information relating to those instruments; or
• when those transactions may qualify as an activity constituting market manipulation.

In addition, although discretionary treasury stock transactions carried out under buy-back programs, stabilisation measures or liquidity contracts are protected within a ‘safe harbour’ under MAR, this only means that operating under these legal instruments initially guarantees compliance with regulations on market abuse under MAR. Issuers who decide to carry out treasury stock transactions beyond the scope of these legal instruments under discretionary management will still be entitled to do so, but will be exposed to a greater risk of their transactions being audited by the CNMV ex-post.

Therefore, the CNMV recommendations may still be used as an orientative specification of the general legal limits regarding discretionary treasury stock transactions, and trading in compliance with them can provide a reasonable basis for reducing the risk of breaching market abuse regulations. However, the issuer must always comply with the relevant corporate and market abuse provisions and be able to provide evidence in relation to said compliance.

The market abuse recommendations

The current market abuse framework regulating discretionary treasury stock transactions in Spain is MAR. Under MAR, there is a prohibition to execute or attempt to engage in insider dealing, and to recommend or induce another person to engage in insider dealing. Insider dealing arises when a person possesses inside information and uses that information by acquiring or disposing of financial instruments to which that information relates. Cancelling or amending an order concerning a financial instrument to which inside information relates to, where the order was placed before, shall also be considered to be insider dealing.

Under MAR, there is also a prohibition to engage or attempt to engage in market manipulation. For the purposes of MAR, market manipulation shall comprise, amongst others:

• entering into a transaction or any other behaviour which
  • gives, or is likely to give, false or misleading signals as to the supply, demand, or price of a financial instrument; or
  • secures, or is likely to secure, the price of a financial instrument; and
• entering into a transaction or any other behaviour which affects or is likely to affect, employing a fictitious device or any other form of deception or contrivance, the price of a financial instrument.

Annex I of MAR gives a non-comprehensive list of indicators of manipulative behaviour. In relation to the limits (or indicators) on the traded volume of discretionary treasury stock transactions, the following factors may be taken into account to evaluate if a behaviour constitutes market manipulation:

• the extent to which orders or transactions undertaken represent a significant proportion of the daily volume of transactions in the relevant financial instrument, in particular when they lead to a significant change in price; and
• the extent to which orders or transactions undertaken or cancelled, including position reversals in a short period, represent a significant proportion of the daily volume of transactions in the relevant financial instrument, and which might be associated with significant changes in its price.

In relation to the limits on the price (or indicators) of discretionary treasury stock transactions, the extent to which orders or transactions undertaken by persons with a significant position in a financial instrument lead to significant changes in its price may be taken into account to evaluate if a behaviour constitutes market manipulation.

In relation to the temporary limits (or indicators), on discretionary treasury stock transactions, the following factors may be taken into account to evaluate if a behaviour constitutes market manipulation:

• the extent to which orders or transactions undertaken are concentrated within a short time span in the trading session and lead to a price change which is subsequently reversed; and
• the extent to which orders or transactions are undertaken at or around a specific time when prices and valuations are calculated and lead to price changes which have an effect on such prices and valuations.

Other limits to, or indicators in relation to, discretionary stock transactions in order to evaluate if a behaviour constitutes market manipulation include:

• whether transactions undertaken lead to no change in beneficial ownership; and
• the extent to which the orders to trade change the best bid or offer prices in a financial instrument, and are removed before they are executed.

The CNMV recommendations

As mentioned before, the former CNMV recommendations may still be taken as a basis for compliance with market abuse regulation when managing discretionary treasury stock transactions, as they may be taken as an orientative specification of the general market abuse legal framework with regard to this kind of transaction.

First, the former CNMV recommendations did not limit the purposes of the specific treasury stock transaction but clarified that it could not have as its main objective to influence the price or the liquidity of the issuer’s securities.

In addition, issuers were recommended to disclose to CNMV the identity of any investment firm or credit institution acting on their behalf regarding discretionary treasury stock transactions, and to submit the contracts signed with such intermediaries. Where the issuers have disclosed relevant information to the CNMV on the acquisition or merger with another company, and that transaction is going to be paid for with treasury stock, it was recommended that issuers observe the following disclosure guidelines:

• prior to acquiring treasury stock, the issuer should submit the corresponding communication to the CNMV with:
  • the purpose of the acquisitions;
  • the number of treasury shares to be acquired; and
  • the time frame for completing such purchases;
• the issuer should disclose the details of any transactions made with treasury shares by the end of the seventh trading day following the date of execution; and
• where the acquisition or merger is not completed, the issuer should disclose this, as well as what it has done or plans to do with the treasury stock acquired.

If the acquisition or merger had not been made public, issuers which were going to acquire treasury stock to use as consideration should nonetheless submit the above information to the CNMV.

Regarding the limits on the traded volume of discretionary treasury stock transactions, it was recommended that the total daily volume – both acquisitions and sales – did not exceed 15 per cent of the average daily volume of acquisitions executed in the 30 previous sessions in the order book facility (excluding the volume of blocks and the special operations market) of the market. This limit may increase to 25 per cent where the treasury stock acquired is going to be used as consideration in an acquisition or merger.

Regarding the limits on the price of discretionary treasury stock transactions, it was recommended that buy orders not be made at a price greater than the highest price between:

• the last price traded in the market between independent parties; and 
• the price of the highest buy order in the market order book. 

Sell orders were not to be executed at a price lower than:

• the lowest price between the last price traded in the market between independent parties; and
• the price of the lowest sell order in the market order book.

In addition, the buy and sell prices should not create trends in the security's price.

With respect to the temporary limits on discretionary treasury stock transactions, it was recommended that:

• the issuer should not enter buy or sell orders during the opening or closing auctions, except where the transaction carried out in those periods was exceptional and duly justified or the issuer's shares were traded under the fixing system;
• the issuer should not trade in treasury shares during the period between the delay of the disclosure of inside information, in accordance with Article 17.4 of MAR, and the date on which that information was finally disclosed;
• where trading is suspended, the issuer should not enter orders during the auction period prior to resumption of trading until trades in the share were matched; and
• the issuer should not carry out treasury stock transactions during the 15 days before the announcement of a financial report.

Conclusions

In view of the above, we can conclude that discretionary treasury stock transactions can still be carried out in Spain, complying with the relevant corporate and market abuse provisions set out above, even though the CNMV recommendations have been rendered ineffective.

The former CNMV recommendations may be taken as an orientative specification of the general market abuse regulation framework in relation to discretionary treasury stock transactions, and so their content may still be used as a basis for compliance with market abuse regulation when carrying out these transactions.

Finally, the CNMV has traditionally exerted a high level of scrutiny with regards to discretionary treasury stock transactions, and so issuers must be prepared to evidence their compliance.
 

End notes